UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2009
OR
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¨
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
Transition Period from
to
Commission
File Number: 000-50838
NETLOGIC
MICROSYSTEMS, INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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77-0455244
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(State
or Other Jurisdiction of Incorporation)
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(I.R.S.
Employer Identification No.)
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1875
Charleston Road, Mountain View, California
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94043
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(Address
of principal executive office)
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(Zip
Code)
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(650)
961-6676
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
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Common
Stock, $0.01 par value per share
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The
NASDAQ Stock Market LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
| Title of each class | Name of each exchange on which registered | |
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Series
AA Junior Participating Preferred Stock, $0.01 par value per
share
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None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨
No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the
Act. Yes ¨
No x
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12
months (or for such shorter period that the registrant was required to submit
and post such files). Yes ¨
No ¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “large
accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one.)
Large
accelerated filer ¨ Accelerated
filer x Non-accelerated
filer (Do not check if a smaller reporting company) ¨
Smaller
reporting company ¨
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.): Yes ¨
No x
The
aggregate market value of the voting stock held by non-affiliates of the
registrant as of June 30, 2009, the last business day of the registrant’s
most recently completed second fiscal quarter, was approximately $679,787,184
(based on the last reported sale price of $36.46 on June 30,
2009).
28,746,887 shares
of the Registrant’s common stock, par value $0.01 per share, were outstanding as
of January 31, 2010.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
registrant’s proxy statement to be delivered to stockholders in connection with
the registrant’s 2010 Annual Meeting of Stockholders to be held on or about
May 7, 2010 are incorporated by reference into Part III of this Form 10-K.
The registrant intends to file its proxy statement within 120 days after its
fiscal year end.
FISCAL
2009 FORM 10-K
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Forward-looking
Statements
This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, which include, without
limitation, statements about our future business operations and results, the
market for our technology, our strategy and competition. Such statements are
based upon current expectations that involve risks and uncertainties. Any
statements contained herein that are not statements of historical fact may be
deemed forward-looking statements. For example, the words “believes”,
“anticipates”, “plans”, “expects”, “intends” and similar expressions are
intended to identify forward-looking statements. Our actual results and the
timing of certain events may differ significantly from the results discussed in
the forward-looking statements. Factors that might cause such a discrepancy
include, but are not limited to, those discussed in “Business”, “Risks Factors”,
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” and “Quantitative and Qualitative Disclosures About Market Risk”
below. All forward-looking statements in this report are based on information
available to us as of the date of this report, and we assume no obligation to
update any such forward-looking statements. The information contained in this
report should be read in conjunction with our condensed financial statements and
the accompanying notes contained in this report. Unless expressly stated or the
context otherwise requires, the terms “we”, “our”, “us” and “NetLogic
Microsystems” refer to NetLogic Microsystems, Inc.
Overview
We are a
leading fabless semiconductor company that designs, develops and sells
proprietary high-performance processors and high-speed integrated circuits that
are used to enhance the performance and functionality of advanced 3G/4G mobile
wireless infrastructure, data center, enterprise, metro Ethernet, edge and core
infrastructure networks. Our market-leading product portfolio
includes high-performance multi-core processors, knowledge-based processors,
high-speed 10/40/100 Gigabit Ethernet (GE) physical layer (PHY) devices, network
search engines, and ultra low-power embedded processors. These
products are designed into high-performance systems such as switches, routers,
wireless base stations, radio network controllers, security appliances,
networked storage appliances, service gateways and connected media devices
offered by leading original equipment manufacturers (OEMs) such as AlaxalA
Networks Corporation, Alcatel-Lucent, ARRIS Group, Inc., Brocade Communications
Systems, Inc., Cisco Systems, Inc., Dell Inc., Ericsson, Fortinet, Inc.,
Fujitsu Limited, Hangzhou H3C Technologies Co. Ltd., Hitachi, Ltd., Huawei
Technologies Co., Ltd., Huawei Symantec Technologies Co.,Ltd , IBM Corporation,
Juniper Networks, Inc. , LG Electronics, Inc., Motorola, Inc., NEC Corporation,
Samsung Electronics, Sun Microsystems, Inc., Tellabs, and ZTE
Corporation.
The products
and technologies we have developed and acquired are targeted to enable our
customers to develop systems that support the increasing speeds and complexity
of the Internet infrastructure. We believe there is a growing need to include
multi-core processors, knowledge-based processors, and high speed physical layer
devices in a larger number of such systems as networks transition to all
Internet Protocol (IP) packet processing at increasing speeds and
complexity.
In 2009 we
continued to broaden our customer base and our product portfolio, as well as
strengthen our competitive positioning and research and development
capabilities, by entering into strategic acquisitions, including:
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The
acquisition of the network search engine business from Integrated Devices
Technology, Inc. (the “IDT NSE Acquisition”) in July 2009. The acquisition
was accounted for as a business combination during the third quarter of
fiscal 2009. As purchase consideration we paid $98.2 million in cash, net
of a price adjustment based on a determination of the actual amount of
inventory received.
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The
acquisition of RMI Corporation, or RMI, a provider of high-performance and
low-power multi-core, multi-threaded processors. Pursuant to the Agreement
and Plan of Merger Reorganization by and among us, Roadster Merger
Corporation, RMI Corporation and WP VIII Representative LLC dated as of
May 31, 2009, or the merger agreement, on October 30, 2009,
Roadster Merger Corporation was merged with and into RMI, and we delivered
merger consideration of approximately 5.0 million shares of our
common stock and $12.6 million cash to the paying agent for distribution
to the holders of RMI capital stock. Approximately 10% of the shares of
our common stock are being held in escrow as security for claims and
expenses that might arise during the first 12 months following the closing
date. We may be required to pay up to an additional 1.6 million
shares of common stock and $15.9 million cash to the former holders of RMI
capital stock as earn-out consideration based upon achieving specified
percentages of revenue targets for either the 12-month period from
October 1, 2009 through September 30, 2010, or the 12-month
period from November 1, 2009 through October 31, 2010, whichever
period results in the higher percentage of the revenue target. The
additional earn-out consideration, if any, net of applicable indemnity
claims, will be paid on or before December 31,
2010.
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Our
Markets
We sell our
products primarily to OEMs that supply networking equipment for the Internet
infrastructure, which consists of various networking systems that process
packets of information to enable communication between the networking systems.
This networking equipment includes routers, switches, application acceleration
equipment, network security appliances, network access equipment and networked
storage devices that are utilized by networking systems such
as:
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core
networks, for long-distance city-to-city communications which may span
hundreds or thousands of miles;
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enterprise
networks, for internal corporate communications, including access to
storage environments;
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datacenter
networks, for high-density server
farms;
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metro
networks, for intra-city communications which may span several
miles;
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edge
networks, which link core, metro, enterprise and access networks;
and
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access
networks, which connect individual users to the edge
network.
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Sales of IP based
networking equipment have increased overall during the past five years, as the
Internet has continued to grow and evolve to accommodate the continued growth in
the amount of digital media content available and provide converged support for
the quad-play applications of voice, data, video and mobility over a single
unified IP infrastructure. These applications include:
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mobile
Internet services (delivery of data, voice and video to mobile
devices);
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cloud
computing and data center
virtualization;
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Internet
Protocol television, or IPTV;
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video
on demand, or VoD;
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voice
transmission over the Internet, or
VoIP;
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on-line
gaming;
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filtering
of malware (e.g., virus, spyware and spam) and intrusion
attempts;
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email
communications;
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e-commerce;
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music,
picture and video file downloading and sharing to mobile devices such as
cell phones and portable music/video devices;
and
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Internet
browsing and video portal viewing delivered over the IP infrastructure to
cell phones and other mobile
devices.
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Due to the
increased usage of the Internet, as well as the greater complexity of the
Internet-based infrastructure to support quad-play applications, OEM systems
must increasingly make complex decisions about individual packets of information
using knowledge about the overall network, which includes the method and
manner in which networking systems are interconnected, as well as traffic
patterns and congestion points, connection availability, user-based privileges,
priorities and other attributes. These OEM systems also need knowledge
about the content carried by the network and the applications that use the
network. Using this knowledge of the network to make complex decisions about
individual packets of information involves network awareness, while using
knowledge of packet content to make complex decisions about individual packets
of information involves content awareness, also known as deep-packet inspection.
Network awareness and content awareness include the following:
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preferential
transmission of packets based upon assigned
priority;
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restrictions
on access based upon security
designations;
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changes
to packet forwarding destinations based upon traffic patterns and
bandwidth availability, or packet content;
and
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addition
or deletion of information about networks and users and
applications.
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Moreover,
network and content awareness in advanced systems require multiple classes of
packet processing, in addition to forwarding packets in the network. These
additional classes of processing include access control for network security,
prioritization of packets to maintain quality of service (QoS) and statistical
measurement of internet traffic for transaction billing. Compared to the basic
processing task of forwarding, these additional classes of
packet processing require a significantly higher degree of processing of IP
packets to enable network and content awareness, or network-aware and
content-aware processing.
Further, in
designing high performance systems, networking OEMs need to address other
performance issues, such as power dissipation. Minimizing the power dissipated
by integrated circuits is becoming more important for networking systems such as
routers and switches, which are increasingly designed in smaller form factors.
As a result, networking OEMs increasingly seek third party providers of advanced
processing solutions that complement their core competencies to enable network
and content awareness within their systems and meet their escalating performance
requirements for rapid processing speeds, complex decision-processing
capabilities, low power dissipation, small form factor and rapid
time-to-market.
Our
Strategy
Our
objectives are to be the leading provider of network-aware and content-aware
processing solutions, high-speed multi-core, multi-threaded processors, as well
as 10 to 100 Gigabit PHY layer solutions, to networking OEMs and to expand
into new markets and applications. To achieve these goals, we are pursuing the
following strategies:
Maintain and Extend
our Market and Technology Leadership Positions. We were the first
supplier: (i) to offer a knowledge-based processor with a high-speed serial
interface; (ii) to offer a “hybrid” architecture that integrates our advanced
Sahasra™ algorithmic technology with knowledge-based processing engines; (iii)
to offer a knowledge-based processor capable of delivering 1.6 billion decisions
per second of deterministic performance; (iv) to offer 225Gbps of interconnect
bandwidth, 256 thousand IPv6 database entries and 1 million Internet
Protocol Version 4 (IPv4) data entries; (v) the first supplier to achieve 1.0
Volt operation of knowledge-based processors for lower power dissipation; and
(vi) to achieve operating frequencies of up to 500 MHz. We were also the first
supplier of knowledge-based processors that are capable of processing
application networking and security functions with a single 10
Gigabit-per-second engine. In addition, we were the first supplier of quad-port
10 Gigabit and 100 Gigabit PHY solutions targeted at next-generation carrier
optical transport networks and advanced data-center networks. We intend to
expand our market and technology leadership positions by continuing to invest in
the development of successive generations of our knowledge-based processors,
multi-core processors, 10/40/100 Gigabit PHYs and our other products to meet the
increasingly high performance needs of networking OEMs, and as well as
potentially acquire such capabilities through strategic partnerships and
purchases of other businesses when we encounter favorable opportunities. We
intend to leverage our engineering capabilities and continue to invest
significant resources in recruiting and developing additional expertise in the
area of high performance circuit design, custom circuit layout, high performance
Input/Output interfaces, and applications engineering. By utilizing our
proprietary design methodologies, we intend to continue to target the most
demanding, advanced applications for our products.
Focus on Long-Term
Relationships with Industry-Leading OEM Customers. The design and
product life cycles of our OEM customers’ products have traditionally been
lengthy, and we work with our OEM customers at the pre-design and design stages.
As a result, our sales process typically requires us to maintain a long-term
commitment and close working relationship with our existing and potential OEM
customers. This process involves significant collaboration between our
engineering teams and the engineering teams of our OEM customers, and typically
involves the concurrent development of our processors and the
internally-designed packet processors of our OEM customers. We intend to
continue to focus on building long-term relationships with industry-leading
networking OEMs to facilitate the adoption of our products and to gain greater
insight into the needs of our OEM customers.
Leverage Technologies
to Create New Products and Pursue New Market Opportunities. We
intend to leverage our core design expertise to develop our products for a
broader range of applications to further expand our market opportunities. We
plan to address new market segments that are increasingly adopting network-aware
processing, such as corporate storage networks that use IP-based
packet-switching networking protocols. By utilizing our proprietary design
methodologies, we intend to continue to target the most demanding, advanced
applications for our products.
Capitalize on Highly
Focused Business Model. We are a fabless semiconductor company,
utilizing third parties to manufacture, assemble and test our products. This
approach reduces our capital and operating requirements and enables us to focus
greater resources on product development. We work closely with our
wafer foundries to incorporate advanced process technologies in our
solutions to achieve higher levels of performance and to reduce costs. These
technologies include advanced 130, 110, 80, 55 and 40 nanometer complimentary
metal oxide semiconductor (CMOS) processing nodes with up to eight layers of
copper interconnect and 300 millimeter wafer sizes. Our business model allows us
to benefit from the large manufacturing investment of our wafer foundries which
are able to leverage their investment across many markets.
Expand International
Presence. We sell our products on a worldwide basis and utilize a
network of direct sales, independent sales representatives and distributors in
the U.S., Europe and Asia. We intend to continue to expand our sales and
technical support organization to broaden our customer reach in new markets. We
believe that Asia, in particular China and Europe, where we have already
established customer relationships, provides the potential for significant
additional long-term growth for our products. Given the continued globalization
of OEM supply chains, particularly with respect to design and manufacturing, we
believe that having a global presence will become increasingly important for
securing new customers and design wins and to support OEMs in bringing their
products to markets.
Our Products
Our products
include high-performance knowledge-based processors, multi-core processors,
NETLite™ processors,
network search engines, 10/40/100 GE PHY products, and ultra low-power Alchemy®
processors.
Knowledge-based Processors
Knowledge-based
processors are integrated circuits that employ an advanced processor
architecture and a large knowledge or signature database containing information
on the network, as well as applications and content that run on the
network, to make complex decisions about individual packets of information
traveling through the network. Our knowledge-based processors significantly
enhance the ability of networking OEMs to supply network service providers with
systems offering more advanced functionality for the Internet, such as support
for IPTV, VoIP, unified threat management (UTM), virtual private networks
(VPNs), rich content delivery over mobile wireless networks, and streaming video
and audio.
Our
knowledge-based processors incorporate advanced technologies that enable rapid
processing, such as a superscalar architecture, which uses parallel-processing
techniques, and deep pipelining, which segments processing tasks into smaller
sub-tasks, for higher decision throughput. These technologies enable wireline
and wireless networking systems to perform a broad range of network-aware and
content-aware processing functions, such as application-based routing, UTM
network security, intrusion detection and prevention, virus inspection, access
control for network security, prioritization of traffic flow to maintain quality
of service and statistical measurement of Internet traffic for transaction
billing.
Layer 3-4
Knowledge-based Processors. Layers 3 and 4 refer to the data and
transport layers, respectively, of the OSI reference model. For networking
infrastructure that supports Layer 3-4 routing, decisions on how to handle IP
packets are made using the data that is contained in the packet header. The
packet header information consists of key data regarding the packet, including
the IP address of the system that generated the packet, referred to as the
source IP address, and the IP address of the device to which the packet is
to be transmitted, referred to as the destination IP address. Our proprietary
NL5000, NL6000, NL7000, NL8000 and NL9000 and NL11000 families of
knowledge-based processors operate in conjunction with an OEM-developed custom
integrated circuits, programmable logic devices, and one or more network
processing units (NPUs), and feature a proprietary interface that provides
advanced interface technology to enable networking OEMs to meet their system
performance requirements for Layer 3-4 processing. We also provide versions of
our proprietary interface knowledge-based processors that work with proprietary
custom integrated circuits and application software developed by or in
collaboration with Cisco Systems. We offer knowledge-based processors
with a range of knowledge database sizes, and all of our knowledge-based
processors are designed to be connected in groups to increase the knowledge
database available for processing.
We offer
knowledge-based processors with a range of knowledge database sizes, and all of
our knowledge-based processors are designed to be connected in groups to
increase the knowledge database available for processing.
In 2009, we
collaborated with one of our long-time foundry partners Taiwan Semiconductor
Manufacturing Company (TSMC) to complete the migration of our knowledge-based
processor family to the 55 nanometer (nm) process node. Additionally, we
recently announced our NL111024 knowledge-based processor fabricated on TSMC’s
40 nm process node. The NL111024 processor includes an enhanced knowledge-based
processing core capable of achieving 1.6 billion decisions per second (BDPS) and
integrates our serializer-deserializer (SerDes) technology from our physical
layer products to provide a serial interface that delivers 225 Gigabits per
second (Gbps) of chip-to-chip interconnect bandwidth. This high
performance input/output (I/O) bandwidth is particularly useful in processing
Internet Protocol Version 6 (IPv6) traffic.
We also offer
our Sahasra family of knowledge-based processors which use advanced algorithms
to achieve low power dissipation and are particularly well suited for
applications using exact match or longest-prefix match functions. This family of
devices scales up to 1.5 million IPv4 entries in a single
device.
NETL7™ Layer 7
Knowledge-based Processors. For networking infrastructure that supports
Layer 7 routing, decisions on how to handle IP packets are made using the
information that is contained in the packet payload or packet content. The
packet content contains the actual data being transmitted between applications
using the network. Layer 7 of the OSI reference model, known as the application
layer, facilitates communication between software applications and lower-layer
network services. Our NETL7TM knowledge-based
processors are designed to accelerate Layer 7 content processing and signature
recognition tasks for enterprise and carrier-class networks.
In April 2009
we announced the NLS2008 processor, which is the newest member of our NETL7 knowledge-based
processor family. The NLS2008 is the first processor capable of
deterministically performing Layer 7 content aware processing functions at 120
Gbps.
NETLite™
Processors
Our NETLite™
processor family is specifically designed for cost-sensitive, high-volume
applications such as entry-level switches, routers and access equipment. The
NETLite processor family leverages circuit techniques developed and refined
during the design of our knowledge-based processor families, and benefits from
die size optimization, lower power dissipation and redundant computing
techniques. In addition, the NETLite processors utilize a simplified pipeline
architecture, as compared to our knowledge based processors, that allows for
lower cost manufacturing and assembly in less expensive packages, and allows for
lower cost system designs. As such, the NETLite processors are ideal for
entry-level systems that do not require the advanced parallel processing and
deep pipelining performance of our high-end knowledge-based
processors.
Our NETLite
processors also include the Ayama™10000 and Ayama 20000 processors. We offer
these processors in densities ranging from 128K to 512K IPv4 entries, and they
include differentiated features such as Mini-Key™ power management. The Ayama
20000 processors incorporate all the features of the Ayama 10000 processors and
work seamlessly with industry-leading network processors and Ethernet switchers.
To help reduce development time and cost, we also offer the Ayama processors
with our Cynapse™ software
platform for customers to more easily integrate these processors into their
systems.
Network
Search Engines
We continue
to provide network search engine products including those we acquired from IDT
in July 2009, the TCAM2 products we purchase from Cypress Semiconductor
Corporation in August 2009, and our legacy network search engines, which include
the NSE1000 through NSE4000, the NSE70000 network search engine families and the
NSE3128GLM network search engines, a device that interfaces directly to certain
NPUs from Applied Micro Circuits Corporation. We introduced our network search
engine products between 1998 and 2001. These products are fabricated by UMC or
TSMC using a range of process technologies from 0.35 micron to 0.15
micron.
High Performance Multi-Core
Processors – RMI Acquisition
We offer a
range of high performance, highly integrated, feature-rich XLR®,
XLS® and
XLPTM
multi-core processor solutions that provide high throughput, power efficiency,
application and content awareness and security for the evolving global network.
These processors serve infrastructure equipment, enterprise systems and
connected media markets within the global network with a wide range of features
and performance configurations. Our multi-core solutions can replace a number of
single function semiconductors through a highly integrated processing solution
which provides customers with greater ease of design and faster time-to-market
for their products.
Our
multi-core processors offer up to four-way multi-threading cores that allow each
thread to act as a virtual central processing unit, or vCPUTM,
thereby making each processor core capable of much higher throughput than a
non-threaded core. The proprietary processor architecture also implements a
high-speed Memory Distributed Interconnect®
network, consisting of a Fast Messaging Network® and
point-to-point interconnects, enabling high-speed communication between cores,
accelerators and network interfaces and more efficient memory access. The
processors also include Autonomous Acceleration Engines ® that
enable them to offload computationally intensive software code from the
processing cores to an on-chip hardware component for faster and more
power-efficient execution. As a result, our processors can perform multiple
complex and specialized tasks such as network traffic prioritization and
application and content inspection without utilizing processor core resources.
In addition, all of our processors incorporate security processing engines or
algorithms for secure connectivity and communications.
In the
communications equipment market, our processor architecture integrates network
accelerators, memory access accelerators, compression and decompression engines,
and high performance network interconnects. This allows our customers to develop
systems with fewer semiconductor components as well as systems that perform a
broader range of functions. This level of integration eliminates the need for
separate co-processors, digital signal processors and the associated complexity
of software for each additional processing component.
XLR® Processor Family. Our
multi-core, multi-threaded XLR processor family is a high throughput,
feature-rich processor solution for a wide variety of high-performance
infrastructure equipment, enterprise networking, security and storage systems.
The XLR processors enable applications, such as integrated security, convergence
of voice, data and video applications (i.e., “triple play applications”),
virtualized storage, load balancing and server offload, as well as content and
application aware, multi-service routing and switching. All XLR processors are
software- and pin- compatible and available in a variety of power options,
enabling scalable system designs within a single platform.
XLS® Processor Family. Our XLS
processor family offers mid- to entry- level derivative versions of our XLR’s
multi-core, multi-threaded architecture. The XLS processors leverage the XLR’s
performance, scalability and technology and incorporate additional advanced
innovations. XLS processors address applications that demand smaller form
factors and lower power consumption. Our XLS processors are pin compatible
within each series and software compatible across all XLS and XLR processor
families.
XLPTM Processor Family. Our latest
generation XLP processor family is based on the XLR processor multi-core,
multi-threaded architecture, and features a multi-issue design and up to three
times higher throughput per Watt than the XLR processors with memory cache
systems, and internal and peripheral interconnects expanded to match the higher
throughput. The XLP processors are expected to enable applications, such as
integrated security, quad-play applications, virtualized storage, load balancing
and server offload, as well as content and application aware, multi-service
routing and switching. The XLP processors are designed on an advanced 40 nm
process and are expected to be available for sampling to customers in
2010.
Ultra
Low-Power Processor Family – RMI Acquisition
Alchemy® Ultra-Low Power Embedded
Processors. Our industry-leading Alchemy® processor family
comprises our industry leading embedded processors that deliver the powerful
processing performance, ultra low-power functionality and market specific
integration required for next-generation products like enterprise thin clients,
automotive infotainment, telematics, and other media-rich embedded applications.
Our ultra low-power embedded Alchemy processor cores are based on the standard
MIPS® processor instruction set. We utilize very low power
microprocessor design techniques and utilize low voltage and low leakage cell
libraries, which allow us to incorporate high power efficient cores in our
chips.
Physical
Layer Products
Our PHY
family of products provides high-performance, single, dual and quad-channel
low-power interface technology for high-density data communication and storage
systems, and offers comprehensive support for multiple 10/40/100 GE standards.
The PHY products also integrate advanced electronic dispersion compensation
technology. We expect our PHY family of products to benefit from the same market
drivers as our knowledge-based processors and multi-core processors, including
growth in 10 GE ports in switches and routers, data center servers, upgrades of
the telecom infrastructure to support IPTV, and the deployment of the 10/40/100
GE IP-backbone for advanced mobile wireless networks.
In July 2009,
we announced our NLP2040 and NLP3040 PHY products, which are the first
single-die, quad-port 10 GE PHY devices on the market, and which are
manufactured using TSMC’s 40 nm process node. Additionally, we announced our
NLP10000 PHY solution which is the first 100 GE PHY solution on the market.
These technology advances in our PHY solutions have enabled us to offer our
customers scalability for data-center, metro and long haul applications that
require the highest performance while maximizing energy efficiency. Also, in
November 2009, we announced production availability of our NLP1220 dual-port 8.5
Gbps FibreChannel PHY repeater device with an integrated low-power equalization
engine targeted at data center switches and enterprise storage
markets.
Customers
The markets
for networking, communication infrastructure, security and storage systems
utilizing our products and services are mainly served by large OEMs, such as
AlaxalA Networks Corporation, Alcatel-Lucent, ARRIS Group, Inc., Brocade
Communications Systems, Inc., Cisco Systems, Inc., Dell Inc.,
Ericsson, Fortinet, Inc., Fujitsu Limited, Hangzhou H3C Technologies Co.
Ltd,Hitachi, Ltd., Huawei Technologies Co., Ltd., Huawei Symantec Technologies
Co.,Ltd , IBM Corporation, Juniper Networks, Inc., LG Electronics, Inc.,
Motorola, Inc., NEC Corporation, Samsung Electronics, Sun Microsystems, Inc.,
Tellabs, and ZTE Corporation.
We work with
these and other OEMs to understand their requirements, and provide them with
solutions that they then qualify and, in some cases, specify for use within
their systems. While we sell directly to some OEMs, we also provide our products
and services indirectly to other OEMs through their contract manufacturers, who
in turn assemble our products into systems for delivery to our OEM customers.
Sales to contract manufacturers accounted for 43%, 41%, and 65% of total revenue
in 2009, 2008, and 2007, respectively. Sales of our products are generally made
under short-term, cancelable purchase orders. As a result, our ability to
predict future sales in any given period is limited and subject to change based
on demand for our OEM customers’ systems and their supply chain
decisions.
We also
provide our products and services indirectly to our OEM customers through our
international stocking sales representatives. Our stocking sales representatives
are independent entities that assist us in identifying and servicing foreign
networking OEMs and generally purchase our products directly from us for resale
to OEMs or contract manufacturers located outside the U.S. These international
stocking sales representatives generally exclusively service a particular
foreign region or customer base, and purchase our products pursuant to
cancelable and re-schedulable purchase orders containing our standard warranty
provisions for defects in materials, workmanship and product performance. At our
option, defective products may be returned for their purchase price or for
replacement. To date, our international stocking sales representatives have
returned a small number of defective products to us. Our international stocking
sales representatives may also act as a sales representative and receive
commissions on sales of our products. Our international stocking sales
representatives include Bussan Microelectronics Corporation/Mitsui Comtek
Corporation and Lestina International Limited. Sales through our international
stocking sales representatives accounted for 6%, 10%, and 11% of total revenue
in 2009, 2008, and 2007, respectively. While we have purchase agreements with
our international stocking sales representatives, they do not have long-term
contracts with any of our OEM customers that use our products and
services.
We also use
distributors to provide valuable assistance to end-users in delivery of our
products and related services. While we have purchase agreements with our
distributors, they do not commit the distributors to purchase specific
quantities of our products. We believe that distributors do not have long-term
contracts with any of their OEM or contract manufacture customers. In accordance
with standard market practice, our distributor agreements limit the
distributor’s ability to return product up to a portion of purchases in the
preceding quarter and limit price protection for inventory on-hand if it
subsequently lowers prices on our products. We recognize sales
through distributors at the time of shipment to end customers.
On
November 7, 2005, we entered into master purchase agreements with each of
Cisco Systems, Inc. and Cisco Systems International B.V. Cisco, who together
with their contract manufacturers, are our largest customers. Pursuant to these
agreements, we agreed to supply to Cisco (including its subsidiaries and
contract manufacturers) certain of our products for incorporation into Cisco’s
products. These agreements set forth the general business terms and conditions
applicable to our sales to Cisco, including,
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our
obligation to accept all purchase orders from Cisco, unless we are unable
to meet Cisco’s schedule;
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our
obligation to ensure that we have the capacity to increase or decrease
production of our knowledge-based processors based upon Cisco’s demand
forecasts;
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our
obligation to use our best efforts to meet Cisco’s stated cost reduction
targets and to provide to Cisco all price decreases that we
achieve;
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“most
favored nation” pricing and related audit rights in favor of Cisco,
providing that, in any quarter, the prices paid by Cisco for our products
(including progeny and replacements), will be the lowest prices paid for
those products by any of our other customers who purchase as much or less
than Cisco;
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our
obligation to provide Cisco, in the event of any short supply of products
or components, an allocation that is no less favorable than that provided
to our other customers purchasing similar quantities of similar
products;
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Cisco’s
cancellation rights for standard and custom
products;
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Cisco’s
approval and related rights with respect to any proposed changes to, or
discontinuation of, our products purchased by
Cisco;
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Cisco’s
right to purchase our knowledge-based processors directly from our
manufacturers under the following
circumstances;
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product
discontinuation;
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bankruptcy,
insolvency and similar situations;
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transfer
of at least 50% of our voting control to a Cisco competitor that generates
less than 50% of its annual sales from integrated circuit
products;
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in
all cases, subject, among other things, to Cisco’s continuing obligation
to pay us for the product and our obligation to disclose the costs charged
to us by our manufacturers;
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perpetual,
royalty-free, non-exclusive, worldwide license grant to Cisco to use
binary code versions of our software in connection with Cisco’s
manufacture, sale, license, loan or distribution of its products;
and
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Cisco’s
extended product warranties, generally for three years and, in the case of
epidemic failures, for five years and our indemnification obligation for
epidemic failures which will not exceed the greater of (on a per claim
basis) 25% of all amounts paid to us by Cisco during the preceding 12
months (approximately $15.4 million at December 31, 2009) or $9.0 million,
plus replacement costs. The initial term of these agreements was three
years and they were automatically renewed through November
2010.
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In 2007, at
Cisco’s request we transitioned into a just-in-time inventory model covering
substantially all of our product shipments to Cisco and its contract
manufacturers. In conjunction with this transition, we entered into a purchase
agreement with Wintec Industries who became the primary purchaser of our
products on a consignment basis for resale to Cisco and Cisco’s contract
manufacturers. We generally have provided to Wintec the same terms and
conditions that we provide to Cisco under the master purchase agreement between
us and Cisco, including: our obligations to accept all purchase orders from
Wintec (unless we are unable to meet Wintec’s schedule), ensure that we
have the capacity to increase or decrease production of our products based upon
Wintec’s demand forecasts, use our best efforts to meet Wintec’s stated cost
reduction targets and provide to Wintec all price decreases that we achieve,
cancellation rights for standard and custom products, and extended product
warranties. We also have extended to Wintec a credit limit sufficient to cover
our anticipated annual business with Cisco and Cisco’s contract manufacturers.
Sales through Wintec accounted for 33% and 35% of total revenue in 2009 and
2008, respectively.
In 2009, 2008
and 2007, Cisco, including its contract manufacturers, accounted for 35%, 38%,
and 50% of our total revenue, respectively. Cisco accounted for a smaller
portion of our total sales in 2009 as we increased our customer diversification.
Alcatel-Lucent was a 13% customer and Huawei Technologies Co., Ltd. became a 10%
customer, by revenue, in 2009. We intend to continue to further diversify our
customer account base in 2010.
Sales,
Marketing and Distribution
Our sales and
marketing strategy is to achieve design wins with leaders and emerging
participants in the networking, communications infrastructure, storage and
security systems market and to maintain these design wins primarily through
leading-edge products and superior customer service. We focus our marketing and
sales efforts at a high organizational level of our potential customers to
access key decision makers. In addition, as many targeted OEMs design custom
integrated circuits to interface to our products, we believe that
applications support at the early stages of design is critical to reducing
time-to-market and minimizing costly redesigns for our customers.
Our product
sales cycles can take over 24 months to complete, requiring a significant
investment in time, resources and engineering before realization of income from
product sales, if at all. Such long sales cycles mean that OEM customers’ vendor
selections, once made, are normally difficult to change. As a result, a design
loss to the competition can negatively impact our financial results for several
years. Similarly, design wins can result in an extended period of revenue
opportunities with that customer.
We market and
sell our products through our direct sales force, distributors, and through
independent sales representatives throughout the world. Our direct sales force
is dedicated to enhancing relationships with our customers. We supplement our
direct sales force with independent sales representatives, who have been
selected based on their understanding of our targeted customers’ systems market
and their level of penetration at our target OEM customers. We also use
application engineers to provide technical support and design assistance to
existing and potential customers.
Our marketing
group is responsible for market and competitive analyses and defining our
product roadmaps and specifications to take advantage of market opportunities.
This group works closely with our research and development group to align
development programs and product launches with our OEM customers’ schedules.
Additionally, this group develops and maintains marketing materials, training
programs and our web site to convey our benefits to our targeted
OEMs.
We operate in
one business segment and primarily sell our products directly to customers in
the United States, Asia and Europe. Sales for the geographic regions reported
below are based upon the bill-to customer headquarter locations. Following is a
summary of the geographic information related to revenues for the years ended
December 31, 2009, 2008, and 2007 (in thousands):
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Year
Ended December 31,
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2009
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2008
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2007
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Revenue:
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United
States
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$ | 43,920 | $ | 46,287 | $ | 48,221 | ||||||
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Malaysia
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54,379 | 42,435 | 34,017 | |||||||||
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China
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47,620 | 30,378 | 14,126 | |||||||||
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Other
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28,770 | 20,827 | 12,699 | |||||||||
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Total
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$ | 174,689 | $ | 139,927 | $ | 109,063 | ||||||
Research
and Development
We devote
substantial resources to the development of new products, improvement of
existing products and support of the emerging requirements of our targeted
customers. We have assembled a team of product designers possessing extensive
experience in system architecture, analog and digital circuit design, hardware
reference board design, software architecture and driver design and advanced
fabrication process technologies. Our engineering design teams are located in
Mountain View and Cupertino, California, Austin, Texas, Beijing, China and
Bangalore and Mumbai, India. As of December 31, 2009, we had
approximately 324 full-time employees engaged in research and development
worldwide. Our research and development expenses were $73.6 million,
$51.6 million, and $45.2 million for the years ended December 31,
2009, 2008, and 2007, respectively.
We use a
number of standard design tools in the design, manufacture and verification of
our products. Due to the highly complex design requirements of our products, we
typically supplement these standard tools with our own tools to create a
proprietary design method that allows us to optimize the performance of our
products at the circuit-level.
Manufacturing
and Materials
We design and
develop all of our products and electronically transfer our proprietary designs
to third party wafer foundries to manufacture our products. Wafers processed by
these foundries are shipped to our subcontractors, where they are assembled into
finished products and electronically tested before delivery to our customers. We
believe that this manufacturing model significantly reduces our capital
requirements and allows us to focus our resources on the design, development and
marketing of our products.
Our principal
wafer foundry is TSMC in Taiwan. We are actively involved with product
development on next-generation processes, and are designing products on TSMC’s
most advanced logic processes. The latest generation of our products employs up
to eight layers of copper interconnect and 300 millimeter wafer
sizes.
Our products
are designed to use industry standard packages and be tested using widely
available automatic test equipment. We develop and control product test programs
used by our subcontractors based on our product specifications. We currently
rely on Amkor Technology, Inc. in Korea, Philippines, and Taiwan, Advanced
Semiconductor Engineering, Inc. in Korea and Taiwan, King Yuan Electronics Co.,
Ltd. in Taiwan, Signetics Corporation in Korea, and ISE Labs, Inc. in the U.S.
to assemble and test our products. We also rely on JSI Shipping to provide
supply chain management services. We also have an office in Taiwan that employs
local personnel to work directly with our Asian wafer manufacturers and assembly
and test houses to facilitate manufacturing operations.
We have
designed and implemented an ISO9001-certified quality management system that
provides the framework for continual improvement of our products, processes and
customer service. We apply well-established design rules and practices for CMOS
devices through standard design, layout and test processes. We also rely on
in-depth simulation studies, testing and practical application testing to
validate and verify our products. We emphasize a strong supplier quality
management practice in which our manufacturing suppliers are pre-qualified by
our operations and quality teams. To ensure consistent product quality,
reliability and yield, we closely monitor the production cycle by reviewing
electrical, parametric and manufacturing process data from each of our wafer
foundries and assembly subcontractors.
We currently
do not have long-term supply contracts with any of our significant third party
manufacturing service providers. We generally place purchase orders with these
providers according to terms and conditions of sales which specify price and
30-day payment terms and which limit the providers’ liability.
Competition
The markets
for our products are highly competitive. We believe that the principal bases of
competition are:
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processing
speed;
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power
dissipation;
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capacity
of the knowledge or signature database that can be
processed;
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advanced
product features allowing OEM and system customer product
differentiation;
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price;
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product
availability and reliability;
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customer
support and responsiveness;
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timeliness
of new product introductions; and
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credibility
in designing and manufacturing
products.
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We believe
that we compete favorably on each of the bases identified above. However, some
of our competitors have greater financial resources and a longer track record as
a semiconductor supplier than we do. We anticipate that the market for our
products will be subject to rapid technological change. As we enter new markets
and pursue additional applications for our products, we expect to face
competition from a larger number of competitors. Within our Layer 2-4
knowledge-based processor, NetLite and network search engine markets, we
primarily compete with Renesas Technology, Corp. In the Layer 7 market, we
primarily compete with certain divisions of LSI Corporation. In the 10-Gigabit
Ethernet physical layer market, we primarily compete with certain divisions of
Applied Micro Circuits Corporation, Broadcom Corporation, Marvell Technology
Group Ltd., Cortina Systems, Inc. and Vitesse Semiconductor Corporation. In the
multi-core processor market, we primarily compete with Applied Micro Circuits
Corporation, Advanced Micro Devices, Inc., Broadcom Corporation, Cavium
Networks, Inc., Freescale Semiconductor, Inc., Intel Corporation, Marvell
Technology Group Ltd., and PMC-Sierra, Inc. We expect to face competition in the
future from our current competitors, other manufacturers and designers of
semiconductors, including large integrated device manufacturers, and innovative
start-up semiconductor design companies.
Intellectual
Property
Our success
and future growth will depend, in part, on our ability to protect our
intellectual property. We rely primarily on patent, copyright, trademark and
trade secret laws to protect our intellectual property. We also attempt to
protect our trade secrets and other proprietary information through agreements
with our customers, suppliers, employees and consultants and through security
protection of our computer network and physical premises. However, these
measures may not provide meaningful protection for our intellectual property.
While our patents and other intellectual property rights are important, we
believe that our technical expertise and ability to introduce new products in a
timely manner will also be important factors in maintaining our competitive
position.
As of January
31, 2010, we held 422 issued U.S. patents and 15 issued
foreign patents with expiration dates ranging from 2011 to 2027. We also
have numerous patent applications pending in the U.S and abroad. We may not
receive any additional patents as a result of these applications or future
applications. Nonetheless, we continue to pursue the filing of additional patent
applications. Any rights granted under any of our existing or future patents may
not provide meaningful protection or any commercial advantage to
us.
Many
participants in the semiconductor industry have a significant number of patents
and have frequently demonstrated a willingness to commence litigation based on
allegations of patent and other intellectual property infringement. From time to
time, we have received, and expect to continue to receive, notices of claims of
infringement or misappropriation of other parties’ proprietary rights. In the
event any such claims result in legal actions, we cannot assure you that we will
prevail in these actions, or that other actions alleging infringement by us of
third party intellectual property rights, misappropriation or misuse by us of
third party trade secrets, or invalidity or unenforceability of our patents will
not be asserted against us or that any assertions of infringement,
misappropriation, misuse, invalidity or unenforceability will not materially and
adversely affect our business, financial condition and results of
operations.
We intend to
protect our rights vigorously, but there can be no assurance that our efforts
will be successful. Thus, despite our precautions, a third party may copy or
otherwise obtain and use our products, services or technology without
authorization, develop similar technology independently or design around our
patents. In addition, effective patent, copyright, trademark and trade secret
protection may be unavailable or limited in certain foreign countries. Moreover,
we often incorporate the intellectual property of third parties into
our designs, which is subject to certain obligations with respect to the
non-use and non-disclosure of such intellectual property. We cannot assure you
that the steps we have taken to prevent infringement, misappropriation or misuse
of our intellectual property or the intellectual property of third parties will
be successful. Furthermore, enforcement of our intellectual property rights may
divert the efforts and attention of our management team and may be costly to
us.
In addition
to our own intellectual property, we also rely on third-party technologies for
the development of our products. We license certain technology from MIPS
Technologies, Inc., pursuant to a license agreement entered into in July 2003
wherein RMI was granted a non-exclusive, worldwide license to MIPS Technologies’
micro-processor core technology to develop, implement and use in its products.
The term of the agreement will expire in July 2017. The agreement
permits us to continue selling in perpetuity products developed during the
term of the agreement containing the licensed technology.
Employees
As of
December 31, 2009, we had 550 full-time employees worldwide, including 324
in research and development, 69 in operations, 114 in sales and
marketing and 48 in general and administrative. None of our employees are
covered by collective bargaining agreements. We believe our relations with our
employees are good.
Available
Information
We organized
our business in 1995 as a California limited liability company and incorporated
in Delaware in 2000. Our Web site address is www.netlogicmicro.com.
The information in our Web site is not incorporated by reference into this
report. Through a link on the Investor Relations section of our Web site, we
make available our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and any amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 as soon as reasonably practicable after they are filed with, or
furnished to, the Securities and Exchange Commission.
If
any of the following risks actually occur, our business, results of operations
and financial condition could suffer significantly.
We
have grown rapidly, and a failure to manage any continued growth could reduce
our potential revenue and could negatively impact our future operating
results.
In 2009, we
completed two major acquisitions. In order to successfully implement our overall
growth strategies, we will need to carefully and efficiently manage our planned
expansion. Among other things, this will require us to continue to:
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improve
our products and technology and develop new
technologies;
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manage
new distribution channels;
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manage
an increasing number of complex relationships with our customers, wafer
foundries and other third parties;
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monitor
and improve our operating systems, procedures and financial controls on a
timely basis;
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retain
existing, and hire additional, key management and technical
personnel;
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expand,
train and manage our workforce and, in particular, our research and
development, sales, marketing and support
organizations.
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retain
and expand the customer base for the IDT NSE Business and the RMI product
offerings;
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integrate
and improve the IDT and RMI manufacturing operations;
and
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integrate
and manage the foreign entities acquired in the RMI
acquisition.
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We may not be
able to adequately manage our growth or meet the foregoing objectives. A failure
to do so could jeopardize our future revenue and cause our stock price to
decline. Also, our ability to execute our business plan and grow our business
will be heavily dependent on our management team’s ability to work effectively
together.
Our
operating cash needs have increased substantially as a result of our acquisition
of RMI in October 2009 and other recent acquisitions, and if we are unable to
generate adequate cash flow from our operations to meet these needs, our
liquidity may be impaired.
Although in
recent years we have generated sufficient net cash from operations to meet our
capital requirements, we have become substantially larger with greater operating
cash needs as a result of the RMI and other recent acquisitions. We may be
required to pay up to $15.9 million cash to the former holders of RMI capital
stock as earn-out consideration based upon achieving specified percentages of
revenue targets for either the 12-month period from October 1, 2009 through
September 30, 2010, or the 12-month period from November 1, 2009
through October 31, 2010, whichever period results in the higher percentage
of the revenue target. The earn-out consideration, if any, net of applicable
indemnity claims, will be paid on or before December 31, 2010.
Our future
cash needs will depend on many factors, including the amount of revenue we
generate, the timing and extent of spending to support product development
efforts, the expansion of sales and marketing activities, the timing of
introductions of new products, the costs to ensure access to adequate
manufacturing capacity, and the continuing market acceptance of our products,
and any future business acquisitions that we might undertake. These factors, in
turn, depend in large part on the success of our efforts to integrate the RMI
and IDT NSE businesses we acquired with our own business as it existed prior to
the acquisitions. In the event that we do not achieve the synergies and realize
other benefits we anticipated achieving from these acquisitions, our future cash
needs may be greater than we currently anticipate. We have also incurred and may
continue to incur significant transaction expenses in connection with these
acquisitions and other transactions.
We may seek
additional funding through public or private equity or debt financing, and we
have a shelf registration statement that would allow us to sell up to an
additional amount of approximately $120 million of our securities from time to
time during the next three years. However, additional funding could be
constrained by the terms and covenants under our senior secured credit facility
and may not be available on terms acceptable to us or at all. We also might
decide to raise additional capital at such times and upon such terms as
management considers favorable and in our interests, including, but not limited
to, from the sale of our debt and/or equity securities under our shelf
registration statement, but we cannot be certain that we will be able to
complete offerings of our securities at such times and on such terms as we may
consider desirable for us. Any such financings may be upon terms that are
potentially dilutive to existing stockholders.
We
derive most of our revenue from sales of our knowledge-based processors, and, if
the demand for these products and other products does not grow, we may not
achieve our growth and strategic objectives.
Our
knowledge-based processors are used primarily in networking systems, including
routers, switches, network access equipment and networked storage devices.
Although our recent acquisition of RMI has expanded our product portfolio, we
have historically derived a substantial portion of our total revenue from sales
of our knowledge-based processors and expect to continue to derive a significant
portion of our total revenues from these products for the foreseeable future. We
believe our future business and financial success depends on continued market
acceptance and increasing sales of our knowledge-based processors. In order to
meet our growth and strategic objectives, networking and communications
infrastructure OEMs must continue to incorporate, and increase the incorporation
of, our products into their systems as their preferred means of enabling
network-aware processing of IP packets, and the demand for their systems must
grow as well. We cannot provide assurance that sales of our knowledge-based
processors will increase substantially in the future or that the demand for our
customers’ systems will increase as well. Our future revenues from these
products may not increase in accordance with our growth and strategic objectives
if the OEM customers modify their current product designs or select products
sold by our competitors instead. Thus, the future success of this part of our
business depends in large part on factors outside our control, and sales of our
knowledge-based processors and other products may not meet our revenue growth
and strategic objectives. Additionally, due to the high concentration of our
sales with a small number of OEMs, we cannot guarantee that the demand for the
systems offered by these customers will increase or that our sales will increase
outside this core customer base, and, accordingly, prior quarterly or
annual results may not be an indication of our future revenue growth or
financial results.
Because
we rely on a small number of customers for a significant portion of our total
revenue, the loss of, or a significant reduction in, orders for our products
from these customers would negatively affect our total revenue and
business.
To date, we
have been dependent upon orders for sales our products to a limited number of
customers, and, in particular, Cisco, for most of our total revenue. During the
years ended December 31, 2009, 2008 and 2007, Cisco and its contract
manufacturers accounted for 35%, 38% and 50% of our total revenue, respectively.
In addition, because the market segments served by us and RMI prior to the
acquisition were complementary and some of our significant customer bases
overlapped, the combination of our companies has not reduced our dependency on
sales to some of our significant customers that we share. We expect that our
future financial performance will continue to depend in large part upon our
relationship with Cisco and several other large OEMs.
We cannot
assure you that existing or potential customers will not develop their own
solutions, purchase competitive products or acquire companies that use
alternative methods in their systems. We do not have long-term purchase
commitments from any of our OEM customers or their contract manufacturers.
Although we entered into master purchase agreements with certain significant
customers including Cisco, one of Cisco’s foreign affiliates and a Cisco
purchasing agent, these agreements do not include any long-term purchase
commitments. Cisco and our other customers do business with us currently only on
the basis of short-term purchase orders (subject, in the case of Cisco, to the
terms of the master purchase agreements), which often are cancelable prior to
shipment. The loss of orders for our products from Cisco or other major users of
our products would have a significant negative impact on our
business.
We
face additional risks to our business success and financial condition because of
our dependence on a small number of customers for sales of our
products.
Our
dependence on a small number of customers, especially Cisco and its contract
manufacturers, for most of our revenue in the foreseeable future creates
additional risks for our business, including the following:
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we
may face increased pressure to reduce the average selling prices of our
products;
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we
may find it difficult to pass through increases in our manufacturing and
other direct costs;
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the
reputation of our products in the marketplace may be affected adversely if
Cisco or other OEMs that represent a significant percentage of our sales
of products reduce or cease their use of our products;
and
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we
may face problems in collecting a substantial portion of our accounts
receivable if any of these companies faces financial difficulties or
dispute payments.
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While
we achieved profitability in recent years, we had a net loss in 2009 and a
history of net losses prior to 2005. We may incur significant net losses in the
future and may not be able to sustain profitability.
We reported a
net loss of $47.2 million during the year ended December 31, 2009. We
reported net income of $3.6 million and $2.6 million during the years ended 2008
and 2007, and we have reported net losses in years prior to fiscal 2005. At
December 31, 2009, we had an accumulated deficit of approximately $123.1
million. To regain profitability, we will have to continue to generate
greater total revenue and control costs and expenses. We cannot assure you that
we will be able to generate greater total revenue, or limit our costs and
expenses, sufficiently to sustain profitability on a quarterly or annual basis.
Moreover, if we continue to make acquisitions and other transactions that
generate substantial expenses for acquired intangible assets and similar items
as well acquisition costs, we may not become profitable in the near term even
though we otherwise meet our growth and operting objectives. For
example, for the year ended December 31, 2009 we recorded $62.4 million of
non-cash operating expenses. See “Cash Flows during the Year ended December 31,
2009” in Item 7, Management ‘s Discussion and Analysis of Financial Conditions
and Results of Operations, and Note 2, “Business Combinations and Asset
Purchase” in the Notes to Consolidated Financial Statement.
Because
we sell our products on a purchase order basis and rely on estimated forecasts
of our customers’ needs, inaccurate forecasts could adversely affect our
business.
We sell our
products pursuant to individual purchase orders (subject, in the case of Cisco
and certain key customers, to the terms of a master purchase agreement), and not
pursuant to long-term purchase commitments. Therefore, we rely on estimated
demand forecasts, based upon input from our customers, to determine how much
product to manufacture. Because our sales are based on purchase orders, our
customers may cancel, delay or otherwise modify their purchase commitments with
little or no consequence to them and with little or no notice to us. For these
reasons, we generally have limited visibility regarding our customers’ product
needs. We cannot provide assurance as to the quantities or timing required by
our customers for our products. We cannot assure you that we will not experience
subsequent substantial warranty claims or that warranty claims will not result
in cancellation of existing orders or reluctance of customers to place future
orders. In addition, the product design cycle for networking OEMs is
lengthy, and it may be difficult for us to accurately anticipate when they will
commence commercial shipments of products that include our knowledge-based
processors. Whether in response to changes affecting the industry or a
customer’s specific business pressures, any cancellation, delay or other
modification in our customers’ orders could significantly reduce our revenue,
cause our operating results to fluctuate from period to period and make it more
difficult for us to predict our revenue. In the event of a cancellation or
reduction of an order, we may not have enough time to reduce operating expenses
to minimize the effect of the lost revenue on our business, and we may purchase
too much inventory and spend more capital than expected.
Additionally,
if we overestimate customer demand for our products, we may purchase products
from manufacturers that we may not be able to sell. Conversely, if we
underestimate customer demand or if sufficient manufacturing capacity were
unavailable, we would forego revenue opportunities and could lose market share
in the markets served by our products. In addition, our inability to meet
customer requirements for our products could lead to delays in product
shipments, force customers to identify alternative sources and otherwise
adversely affect our ongoing relationships with our
customers.
We
are dependent on contract manufacturers for a significant portion of our
revenue.
Many of our
OEM customers, including Cisco, use third party contract manufacturers to
manufacture their systems. These contract manufacturers represented 43%, 41% and
65% of our total revenue for the year ended December 31, 2009, 2008 and
2007, respectively. Contract manufacturers purchase our products directly from
us on behalf of OEMs. Although we work with our OEM customers in the design and
development phases of their systems, these OEM customers are gradually giving
contract manufacturers more authority in product purchasing decisions. As a
result, we depend on a concentrated group of contract manufacturers for a
substantial portion of our revenue. If we cannot compete effectively for the
business of these contract manufacturers or if any of the contract
manufacturers, which work with our OEM customers, experience financial or other
difficulties in their businesses, our revenue and our business could be
adversely affected. In particular, if one of our OEM customer’s contract
manufacturers becomes subject to bankruptcy proceedings, neither we nor our OEM
customer may be able to obtain any of our products held by the contract
manufacturer. In addition, we may not be able to recover any payments owed to us
by the contract manufacturer for products already delivered or recover the
products held in the contract manufacturer’s inventory when the bankruptcy
proceeding is initiated. If we are unable to deliver our products to our OEM
customers in a timely manner, our business would be adversely
affected.
The
average selling prices of our products may decline, which could reduce our
revenue and gross margin.
In our
experience the average selling prices of our products and the RMI products sold
by RMI have declined over the course of their commercial lives, principally due
to the supply of competing products, reduction in demand from customers,
pressure from customers to reduce prices and product cycle changes; we expect
these trends to continue. In addition, under our master purchase agreements with
Cisco, we agreed to provide to Cisco all price decreases that we achieve, and
granted to Cisco the right (under limited circumstances) to purchase our
products directly from our manufacturers (subject to payments to us, net of
specified costs). Declining average selling prices can adversely affect our
future operating results. To maintain acceptable operating results, we will need
to develop and introduce new products and product enhancements on a timely basis
and continue to reduce our costs. If we are unable to offset any reductions in
our average selling prices by increasing our sales volumes and achieving
corresponding production cost reductions, or if we fail to develop and introduce
new products and enhancements on a timely basis, our revenue and operating
results will suffer.
We
rely on third parties for the manufacture of our products, and a significant
increase in wafer pricing or our failure to secure sufficient capacity could
limit our growth and adversely affect our operating results.
As a fabless
semiconductor company, we rely on third-party wafer foundries to manufacture our
products. We currently do not have long-term supply contracts with any of the
wafer foundries, including TSMC, and United Microelectronics Corporation, or
UMC. Neither TSMC nor UMC is obligated to perform services or supply products to
us for any specific period, in any specific quantities or at any specific price,
except as may be provided in a particular purchase order. As a result, there are
numerous risks associated with our reliance on these wafer foundries, including
the possibilities that TSMC or UMC may give higher priority to their other
customers or that our relationships with either wafer foundry may deteriorate.
We cannot assure you that TSMC and UMC will continue to provide us with our
products at acceptable yields or in sufficient quantities, for reasonable costs
and on a timely basis to meet our customers’ needs. A failure to ensure the
timely fabrication of our products could cause us to lose customers and could
have a material adverse effect on our operating results.
If either
wafer foundry, and in particular TSMC, ceases to provide us with required
production capacity with respect to our products, we cannot assure you that we
will be able to obtain manufacturing capacity from other wafer foundries on
commercially reasonable terms or that these arrangements, if established, will
result in the successful manufacturing of our products. These arrangements might
require us to share our technology and might be subject to unilateral
termination by the wafer foundries. Even if such capacity is available from
another manufacturer, we would need to convert the production of our integrated
circuits to a new fabrication process and qualify the other manufacturer, which
process could take nine months or longer. Furthermore, we may not be able to
identify or qualify manufacturing sources that would be able to produce wafers
with acceptable manufacturing yields.
Additionally, some of
the network search engine products we acquired from IDT are manufactured for us
by IDT at their wafer fabrication facilities. While IDT is contratually
obligated to manufacture for us certain quantities of these products, we canno
assure you that IDT will continue to honor these commitments, that IDT's
fabrication facility will remain in business or that IDT will be able to always
meet our production demands which may adversly impact our operating
results.
We
also rely on third parties for other products and services, including the
assembly, testing and packing of our products, and engineering services, and any
failure by third parties to provide the tools and services we require could
limit our growth and adversely affect our future operating results.
Our products
are assembled and tested by third-party vendors that require the use of high
performance assembly and test equipment. In addition, in connection with the
design of our products, we use software tools, which we obtain from third party
software vendors, for simulation, layout and other design purposes. Our reliance
on independent assembly, testing, software and other vendors involves a number
of risks, including reduced control over delivery schedules, quality assurance
and costs. We currently do not have long-term supply contracts with any of these
third party vendors. As a result, most of these third party vendors are not
obligated to provide products or perform services to us for any specific period,
in any specific quantities or at any specific price, except as may be provided
in a particular purchase order. The inability of these third party vendors to
deliver high performance products or services of acceptable quality and in a
timely manner, could lengthen our design cycle, result in the loss of our
customers and reduce our revenue.
We also rely
on third party component suppliers to provide custom designed integrated circuit
packages for our products. In some instances, these package designs are provided
by a single supplier. Our reliance on these suppliers involves a number of
risks, including reduced control over delivery schedules, quality assurance and
costs. We currently do not have long-term supply contracts with any of
these package vendors. As a result, most of these third party vendors are not
obligated to provide products or perform services to us for any specific period,
in any specific quantities or at any specific price, except as may be
provided in a particular purchase order. The inability of these third party
vendors to deliver packages of acceptable quality and in a timely manner,
particularly the sole source vendors, could adversely affect our delivery
commitments and adversely affect our operating results or cause them to
fluctuate more than anticipated. Additionally, these packages may require
specialized or high-performance component parts that may not be available in
quantities or in time frames that meet our requirements or the anticipated
requirement of our customers.
In connection
with the design of our products, we have and may license third party
intellectual property, and use third party engineering services. Our reliance on
these third party intellectual property and engineering services providers
involves a number of risks, including reduced control over and quality of the
intellectual property and service deliverables, quality and costs. The inability
of these third party providers to deliver high performance products or services
of acceptable quality and in a timely manner, could lengthen our design cycle,
result in the loss of our customers and reduce our revenue.
Our costs may increase substantially
if the wafer foundries, assembly and test vendors that supply and test our
products do not achieve satisfactory product yields, reliability or
quality.
The wafer
fabrication process is an extremely complicated process where the slightest
changes in the design, specifications or materials can result in material
decreases in manufacturing yields or even the suspension of production. From
time to time, we and our wafer foundries have experienced, and are likely to
continue to experience manufacturing defects and reduced manufacturing yields
related to errors or problems in our wafer foundries’ manufacturing processes or
the interrelationship of their processes with our designs. In some cases, our
wafer foundries may not be able to detect these defects early in the fabrication
process or determine the cause of such defects in a timely manner, which may
affect the quality or reliability of our products. We may incur substantial
research and development expense for prototype or development stage products as
we qualify the products for production.
Generally, in pricing
our products, we assume that manufacturing, assembly and test yields will
continue to increase, even as the complexity of our products increases. Once our
products are initially qualified with our wafer foundries, minimum acceptable
yields are established. We are responsible for the costs of the wafers if the
actual yield is above the minimum. If actual yields are below the minimum, we
are not required to purchase the wafers. The minimum acceptable yields for our
new products are generally lower at first and increase as we achieve full
production. Whether as a result of a design defect or manufacturing, assembly or
test error, unacceptably low product yields or other product manufacturing,
assembly or test problems could substantially increase the overall production
time and costs and adversely impact our operating results on sales of our
products. Product yield losses will increase our costs and reduce our gross
margin. In addition to significantly harming our operating results and cash
flow, poor yields may delay shipment of our products and harm our relationships
with existing and potential customers.
To
be successful we must continue to develop and have manufactured for us,
innovative products to meet the evolving requirements of networking
OEMs.
To remain
competitive, we devote substantial resources to research and development, both
to improve our existing technology and to develop new technology. We also seek
to improve the manufacturing processes for our products, including the use of
smaller process geometries, which we believe is important for our products to
serve our OEM customers’ requirements for enhanced processing. Our failure to
migrate our products to processes at smaller process geometries could
substantially reduce the future competitiveness of our products. In addition,
from time to time, we may have to redesign some of our products or modify the
manufacturing process for them. We cannot give you any assurance that we will be
able to improve our existing technology or develop and integrate new technology
into our products. Even if we design better products, we may encounter problems
during the manufacturing or assembly process, including reduced manufacturing
yields, production delays and increased expenses, all of which could adversely
affect our business and results of operations.
In addition,
given the highly complex nature of these products, even the slightest change or
adjustment to our integrated circuit designs could require substantial resources
to implement them. We may not be able to make these changes or adjustments to
our products or correct any errors or defects arising from their implementation.
Failure to make these changes or adjustments or correct these errors or defects
during the product development stages, or any resulting delays, could severely
harm our existing and potential customer relationships and could likely increase
our development costs, adversely affecting our operating results. If these
changes, adjustments, errors or defects are not identified or requested until
after commercial production has begun or after products have been delivered to
customers, we may be required to re-test existing inventory, replace products
already shipped or re-design the products, all of which would likely result in
significant time delays and additional costs and expenses.
We
have sustained substantial losses from low production yields in the past and may
incur such losses in the future.
Designing and
manufacturing integrated circuits is a difficult, complex and costly process.
Once research and development has been completed and the foundry begins to
produce commercial volumes of the new integrated circuit, products still may
contain errors or defects that could adversely affect product quality and
reliability. We have experienced low yields and have incurred substantial
research and development expenses in the design and initial production phases of
all of our products, and similar problems have historically been experienced in
the production of the RMI products by RMI. We cannot assure you that we will not
experience low yields, substantial research and development expenses, product
quality, reliability or design problems, or other material problems with our
products that we have shipped or may ship in the future.
If
we fail to retain key personnel and hire additional personnel, our business and
growth could be negatively affected.
Our business
has been dependent to a significant degree upon the services of a small number
of executive officers and technical employees. We generally do not have
non-competition agreements or term employment agreements with any of our
executive officers, whom we generally employ at will. We do not maintain key-man
life insurance on the lives of any of our key personnel. The loss of any of
these individuals could negatively impact our technology development efforts and
our ability to service our existing customers and obtain new
customers.
Our future
growth will also depend, in part, upon our ability to recruit and retain other
qualified managers, engineers and sales and marketing personnel. There is
intense competition for these individuals in our industry, and we cannot assure
you that we will be successful in recruiting and retaining these individuals. If
we are unable to recruit and retain these individuals, our technology
development and sales and marketing efforts could be negatively
impacted.
If
we fail to maintain competitive equity compensation packages for our employees,
or if our stock price declines materially for a protracted period of time, we
might have difficulty retaining our employees and our business may be
harmed.
In today’s
competitive technology industry, employment decisions of highly skilled
personnel are influenced by equity compensation packages, which offer incentives
above traditional compensation only where there is a consistent, long-term
upward trend over time of a company’s stock price. If our stock price declines
due to market conditions, investors’ perceptions of the technology industry or
managerial or performance problems we have, our equity compensation incentives,
especially stock options may lose value to key employees, and we may lose these
employees or be forced to grant additional equity compensation incentives to
retain them. This in turn could result in:
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immediate
and substantial dilution to investors resulting from the grant of
additional equity awards necessary to retain employees;
and
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potential
compensation charges against the company, which could negatively impact
our operating results.
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Additionally,
if we fail to provide an adequate amount of equity consideration to new and
existing employees we may be unable to compete for new talent and retain our
existing talent. The number of shares available for grant under our 2004 Equity
Incentive Plan (the “Plan”) may not be adequate enough to continue to enable us
to competitively compensate our employees, and if we are unable to obtain from
our stockholders an increase in the number of shares authorized under the Plan
either in fiscal year 2010 or fiscal year 2011, we may not be able to retain our
employees which could significantly impact our operating results.
A
failure to successfully address the potential difficulties associated with
international business could reduce our growth, increase our operating costs and
negatively impact our business.
We conduct a
significant amount of our business with companies that operate primarily outside
of the United States, and intend to increase sales to companies operating
outside of the United States. For example, our customers based outside the
United States accounted for 75%, 67% and 56% of our total revenue during the
years ended December 31, 2009, 2008 and 2007, respectively. Not only are
many of our customers located abroad, but our two wafer foundries are based in
Taiwan, and we outsource the assembly and some of the testing of our products to
companies based in Taiwan and Hong Kong. We face a variety of challenges in
doing business internationally, including:
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foreign
currency exchange fluctuations;
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compliance
with local laws and regulations that we not be familiar
with;
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unanticipated
changes in local regulations;
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potentially
adverse tax consequences, such as withholding
taxes;
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timing
and availability of export and import
licenses;
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political
and economic instability;
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reduced
or limited protection of our intellectual
property;
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protectionist
laws and business practices that favor local competition;
and
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additional
financial risks, such as potentially longer and more difficult collection
periods.
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Because we
anticipate that we will continue to rely heavily on foreign based customers for
our future growth, the occurrence of any of the circumstances identified above
could significantly increase our operating costs, delay the timing of our
revenue and harm our business and financial condition.
We
must design our products to meet the needs of our OEM customers and convince
them to use our products, or our revenue will be adversely
affected.
In general,
our OEM customers design our products into their equipment during the early
stages of their development after an in-depth technical evaluation of both our
and our competitors’ products. These design wins are critical to the success of
our business. In competing for design wins, if a competitor’s product is already
designed into the product offering of a potential customer, it becomes very
difficult for us to sell our products to that customer. Changing suppliers
involves additional cost, time, effort and risk for the customer. In addition,
our products must
comply with the continually evolving specifications of our OEMs. Our ability to
compete in the future will depend, in large part, on our ability to comply with
these specifications. As a result, we expect to invest significant time and
effort and to incur significant expense to design our products to ensure
compliance with relevant specifications. Even if an OEM designs our products
into its systems, we cannot assure you that its systems will be commercially
successful or that we will receive significant revenue from sales our products
for those systems.
Factors
that negatively affect the businesses of our targeted OEMs that use or could use
our products could negatively impact our total revenue.
The timing
and amount of our revenue depend on the ability of our targeted OEMs who use our
products to market, produce and ship systems incorporating our technology.
Factors that negatively affect a significant customer or group of customers
could negatively affect our results of operations and financial condition. Many
issues beyond our control influence the success of our targeted OEMs that use
our products, including, for example, the highly competitive environment in
which they operate, the strength of the markets for their products, their
engineering capabilities, their ability or inability to obtain other components
from other suppliers, the compatibility of any of their other components with
our products, the impact of a worldwide recession on their capital spending and
sales of their equipment, and their financial and other resources. Likewise, we
have no control over their product development or pricing strategies, which
directly affect sales of their products and, in turn, our revenue. A decline in
sales of our OEM customers’ systems that use our products would reduce our
revenue. In addition, seasonal and other fluctuations in demand for their
products could cause our operating results to fluctuate, which could cause our
stock price to fall.
We
have a lengthy sales cycle, which may result in significant expenses that do not
generate significant revenue or delayed revenue generation from our selling
efforts and limits our ability to forecast our revenue.
We expect
that our product sales cycle, which results in our products being designed into
our customers’ products, could take over 24 months. It can take an additional
nine months to reach volume production of these products. A number of factors
can contribute to the length of the sales cycle, including technical evaluations
of our products by our OEMs, the design process required to integrate our
products into our OEM customers’ products and the timing of our OEMs’ new
product announcements. In anticipation of product orders, we may incur
substantial costs before the sales cycle is complete and before we receive any
customer payments. As a result, in the event that a sale is not completed or is
cancelled or delayed, we may have incurred substantial expenses, making it more
difficult for us to become profitable or otherwise negatively impacting our
financial results. Furthermore, because of our lengthy sales cycle, our receipt
of revenue from our selling efforts may be substantially delayed, our ability to
forecast our future revenue may be more limited and our revenue may fluctuate
significantly from quarter to quarter.
Our
operating results could be adversely affected if we have to satisfy product
warranty or liability claims.
If our
products are defective or malfunction, we could be subject to product warranty
or product liability claims that could have significant related warranty charges
or warranty reserves in our financial statements. Further, we may spend
significant resources investigating potential product design, quality and
reliability claims, which could result in additional charges in our financial
statements until such claims are resolved. We cannot guarantee that warranty
reserves will either increase or decrease in future periods. Further, in
connection with the master purchase agreements that we entered into with Cisco
in 2005, we agreed to extended product warranties for the benefit of Cisco.
Specifically, we agreed to general three-year warranties and, in the case of
epidemic failures, to five-year warranties. In addition, under the Cisco
agreements, we have agreed to indemnify Cisco for costs incurred in rectifying
epidemic failures, up to the greater of (on a per claim basis) 25% of all
amounts paid to us by Cisco during the preceding 12 months (approximately, $15.4
million at December 31, 2009) or $9.0 million, plus replacement costs. If we are
required to make payments under this indemnity, our operating results may be
adversely affected. Moreover, these claims in the future, regardless of their
outcome, could adversely affect our business.
Our
revenue and operating results may fluctuate significantly from period to period,
on a quarterly or annual basis, causing volatility in our stock
price.
Our total
revenue and operating results have fluctuated from quarter to quarter in the
past and are expected to continue to do so in the future. As a result, you
should not rely on quarter-to-quarter comparisons of our operating results as an
indication of our future performance. Fluctuations in our total revenue and
operating results could negatively affect the trading price of our stock. In
addition, our total revenue and results of operations may, in the future, be
below the expectations set by us or of analysts and investors, which could cause
our stock price to decline. Factors that are likely to cause our revenue and
operating results to fluctuate include, for example, the periodic costs
associated with the generation of mask sets for new products and product
improvements and the risk factors discussed throughout this section. Additional
factors that could cause our revenue and operating results to fluctuate from
period to period include:
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foreign
currency exchange fluctuations;
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the
timing and volume of orders received from our
customers;
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market
demand for, and changes in the average selling prices of, our
products;
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the
rate of qualification and adoption of our products by networking
OEMs;
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fluctuating
demand for, and lengthy life cycles of, the products and systems that
incorporate our products;
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the
market success of the OEMs’ systems that incorporate our
products;
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the
ability of our wafer foundries to supply us with production capacity and
finished products to sell to our OEM
customers;
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changes
in the level of our costs and operating
expenses;
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our
ability to receive our manufactured products from our wafer foundries and
ship them within a particular reporting
period;
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deferrals
or cancellations of customer orders in anticipation of the development and
commercialization of new technologies or for other
reasons;
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changes
in our product lines and revenue
mix;
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the
timing of the introduction by others of competing, replacement or
substitute products technologies;
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our
ability or the ability of our OEM customers that use our products to
procure required components or fluctuations in the cost of such
components;
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cyclical
fluctuations in semiconductor or networking markets;
and
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general
economic conditions that may affect end-user demand for products that use
our products.
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In
addition, RMI’s business has historically been subject to seasonality, which may
cause us to experience greater fluctuation of our revenues following the
acquisition.
The
cyclical nature of the semiconductor industry and the networking markets could
adversely affect our operating results and our business.
We expect our
business to be subject to the cyclicality of the semiconductor industry,
especially the market for communications integrated circuits. Historically,
there have been significant downturns in this industry segment, characterized by
reduced demand for integrated circuits and accelerated erosion of average
selling prices. At times, these downturns have lasted for prolonged periods of
time. Furthermore, from time to time, the semiconductor industry also has
experienced periods of increased demand and production constraints, in which
event we may not be able to have our products produced in sufficient quantities,
if at all, to satisfy our customers’ needs. It is likely that the communications
integrated circuit business will experience similar downturns in the future and
that, during such times, our business could be affected adversely. It is also
likely that the semiconductor industry will experience periods of strong demand.
We may have difficulty in obtaining enough products to sell to our
customers or may face substantial increases in the wafer prices charged by our
foundries.
In addition,
the networking industry from time to time has experienced and may experience a
pronounced downturn. To respond to a downturn, many networking service providers
may be required to slow their research and development activities, cancel or
delay new product developments, reduce their workforces and inventories and take
a cautious approach to acquiring new equipment and technologies from networking
OEMs, which would have a significant negative impact on our business. In the
future, a downturn in the networking industry may cause our operating results to
fluctuate significantly from year to year, which also may tend to increase the
volatility of the price of our common stock.
We
may not be able to protect and enforce our intellectual property rights, which
could impair our ability to compete and reduce the value of our
technology.
Our success
and future revenue growth depend, in part, on our ability to protect our
intellectual property. We rely primarily on patent, copyright, trademark and
trade secret laws, as well as confidentiality procedures, to protect our
proprietary technologies and processes. However, these measures may not provide
meaningful protection for our intellectual property.
We cannot
assure you that any patents will issue from any of our pending applications. Any
rights granted under any of our existing or future patents may not provide
meaningful protection or any commercial advantage to us. For example, such
patents could be challenged or circumvented by our competitors or declared
invalid or unenforceable in judicial or administrative proceedings. The failure
of any patents to adequately protect our technology would make it easier for our
competitors to offer similar products. We do not have foreign patents or pending
applications corresponding to many of our U.S. patents and patent applications,
including in some foreign countries where our products are sold or may be sold
in the future. Even if foreign patents are granted, effective enforcement
in foreign countries may not be available.
With respect
to our other proprietary rights, it may be possible for third parties to copy or
otherwise obtain and use our proprietary technology or marks without
authorization or to develop similar technology independently. Monitoring
unauthorized use of our proprietary technology or marks is difficult and costly,
and we cannot be certain that the steps we have taken will prevent
misappropriation or unauthorized use of our technology or marks. In addition,
effective patent, copyright, trademark and trade secret protection may not be
available or may be limited in certain foreign countries. Many companies based
in the U.S. have encountered substantial infringement problems in foreign
countries, including countries in which we sell products. Our failure to
effectively protect our intellectual property could reduce the value of our
technology and could harm our business, financial condition and operating
results.
Furthermore,
we have in the past and may in the future initiate claims or litigation against
third parties to determine the validity and scope of proprietary rights of
others. In addition, we may in the future initiate litigation to enforce our
intellectual property rights or the rights of our customers or to protect
our trade secrets. Litigation by us could result in significant expense and
divert the efforts of our technical and management personnel and could
materially and adversely affect our business, whether or not such litigation
results in a determination favorable to us.
Any
claim that our products or our proprietary technology infringe third party
intellectual property rights could increase our costs of operation and distract
management and could result in expensive settlement costs.
The
semiconductor industry is characterized by vigorous protection and pursuit of
intellectual property rights or positions, which have resulted in often
protracted and expensive litigation. From time to time, we are involved in
litigation relating to intellectual property rights. In addition, we have
received notices from time to time that claim we have infringed upon or
misappropriated intellectual property rights owned by others. We typically
respond when appropriate and as advised by legal counsel. We cannot assure you
that parties will not pursue litigation with respect to those allegations. We
may, in the future, receive similar notices, any of which could lead to
litigation against us. For example, parties may initiate litigation based
on allegations that we have infringed their intellectual property rights or
misappropriated or misused their trade secrets or may seek to invalidate or
otherwise render unenforceable one or more of our patents. Litigation against us
can result in significant expense and divert the efforts of our management,
technical, marketing and other personnel, whether or not the litigation results
in a determination adverse to us. We cannot assure you that we will be able to
prevail or settle any such claims or that we will be able to do so at a
reasonable cost. In the event of an adverse result in any such litigation, we
could be required to pay substantial damages for past infringement and royalties
for any future use of the technology. In addition, we may be required to cease
the sale of certain products, recall certain products from the market, redesign
certain products offered for sale or under development or cease the use of
certain marks or names. We cannot assure you that we will be able to
successfully redesign our products or do so at a reasonable cost. Additionally,
we have in the past sought and may in the future seek to obtain a license to a
third party’s intellectual rights and have granted and may in the future grant a
license to certain of our intellectual property rights to a third party in
connection with a cross-license agreement or a settlement of claims or actions
asserted against us. However, we cannot assure you that we would be able to
obtain a license on commercially reasonable terms, or at all
Our customers
could also become the target of litigation relating to the patent and other
intellectual property rights of others. This could trigger technical support and
indemnification obligations in some of our license or customer agreements. These
obligations could result in substantial expenses, including the payment by us of
costs and damages related to claims of patent infringement. In addition to the
time and expense required for us to provide support or indemnification to our
customers, any such litigation could disrupt the businesses of our customers,
which in turn could hurt our relations with our customers and cause the sale of
our products to decrease. We cannot assure you that claims for indemnification
will not be made or that if made, such claims would not have a material adverse
effect on our business, operating results or financial condition. We do not have
any insurance coverage for intellectual property infringement claims for which
we may be obligated to provide indemnification. If we are obligated to pay
damages in excess of, or otherwise outside of, our insurance coverage, or if we
have to settle these claims, our operating results could be adversely
affected.
If
we are unable to compete effectively, our revenue and market share may be
reduced.
Our business
is extremely competitive, especially during the design-in phase of our
customers’ design cycles. We compete with large semiconductor manufacturers,
many of which have more established reputations, more diverse customer
bases and greater financial and other resources than we do. In addition, our OEM
customers may design their own integrated circuits to address their system
needs. As we develop new applications for our products and expand into new
markets, we expect to face even greater competition. Our present and future
competitors may be able to better anticipate customer and industry demands and
to respond more quickly and efficiently to those demands, such as with product
offerings, financial discounts or other incentives. Furthermore, our OEM
customers may be able develop or acquire integrated circuits that satisfy their
needs faster or most cost effectively than we can. We cannot assure you that we
will be able to compete effectively against these and our other competitors. If
we do not compete effectively, our revenue and market share may
decline.
Our
success may depend on our ability to comply with new or evolving industry
standards applicable to our products or our business.
Our ability
to compete in the future may depend on our ability to ensure that our products
comply with evolving industry standards affecting our customers’ equipment and
other markets in which we compete. In addition, from time to time, new industry
standards may emerge which could render our products incompatible with the
products of our customers or suppliers. In order to ensure compliance with the
relevant standards, we may be required to devote significant time, capital and
other resources to modify or redesign our existing products or to develop new
products. We cannot assure you that we will be able to develop products which
comply with prevailing standards. If we are unable to develop these products in
a timely manner, we may miss significant business opportunities, and our revenue
and operating results could suffer.
If
an earthquake or other natural disaster disrupts the operations of our third
party wafer foundries or other vendors located in high risk regions, we could
experience significant delays in the production or shipment of our
products.
TSMC and UMC,
which manufacture our products, along with most of our vendors who handle the
assembly and testing of our products, are located in Asia. The risk of an
earthquake in the Pacific Rim region is significant due to the proximity of
major earthquake fault lines. In September 1999, a major earthquake in Taiwan
affected the facilities of several of these third party vendors, as well as
other providers of these services. As a result of this earthquake, these vendors
suffered power outages and disruptions that impaired their production capacity.
In March 2002 and September 2003, additional earthquakes occurred in Taiwan. The
occurrence of additional earthquakes or other natural disasters could result in
the disruption of the wafer foundry or assembly and test capacity of the third
parties that supply these services to us. We may not be able to obtain alternate
capacity on favorable terms, if at all.
Any
future acquisitions we make could disrupt our business, and harm our financial
condition and dilute our stockholders.
In the
future, we may consider additional opportunities to acquire other businesses or
technologies that would complement our current offerings, expand the breadth of
our markets or enhance our technical capabilities. Acquisitions present a
significant number of potential challenges that could, if not met, disrupt our
business operations, increase our operating costs, reduce the value to us of the
acquired company or business, including:
|
•
|
integration
of the acquired employees, operations, technologies and products with our
existing business and products;
|
|
•
|
focusing
management’s time and attention on our existing core
business;
|
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•
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retention
of business relationships with suppliers and customers of the acquired
company;
|
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•
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entering
markets in which we may lack prior
experience;
|
|
•
|
retention
of key employees of the acquired company or
business;
|
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•
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amortization
of intangible assets, write-offs, stock-based compensation and other
charges relating to the acquired business and our acquisition costs;
and
|
|
•
|
dilution
to our existing stockholders from the issuance of additional shares of
common stock or reduction of earnings per outstanding share in connection
with an acquisition that fails to increase the value of our
company.
|
We cannot
provide assurances, however, that this acquisition or future acquisitions that
we might make will achieve our business objectives or increase our value or the
price of our common stock.
RISKS
RELATING TO OUR RECENT ACQUISITION OF RMI CORPORATION
The
integration of RMI may not be completed successfully, cost-effectively or on a
timely basis.
As a result
of our acquisition of RMI in October 2009, we have significantly more assets,
operations and employees to manage than we did prior to the acquisition. The
integration process has required us to significantly expand the scope of our
operations and financial systems, and there is a significant degree of
difficulty and management involvement inherent in that process. These
difficulties include, among others:
|
•
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the
diversion of management’s attention from the day-to-day operations of the
combined company;
|
|
•
|
the
assimilation of RMI employees and the integration of two business
cultures;
|
|
•
|
challenges
in attracting and retaining key
personnel;
|
|
•
|
the
integration of information, accounting, finance, sales, billing, payroll
and regulatory compliance systems;
|
|
•
|
challenges
in keeping existing customers and obtaining new customers;
and
|
|
•
|
challenges
in combining product offerings and sales and marketing
activities.
|
There is no
assurance that we will successfully or cost-effectively integrate RMI’s
operations with our own. For example, the costs of achieving systems integration
may substantially exceed our current estimates. As a non-public company, RMI did
not have to comply with the requirements of the Sarbanes-Oxley Act of 2002 for
internal control and other procedures. Integrating its systems and activities
with ours in order to ensure our continued compliance with those requirements
may continue to cause us to incur substantial additional expense. In addition,
the integration process may cause an interruption of, or loss of momentum in,
the activities of our business. If our management is not able to effectively
manage the integration process, or if any significant business activities are
interrupted as a result of the integration process, our business could suffer
and our results of operations and financial condition may be
harmed.
We
may not be able to realize the anticipated synergies and other benefits we
expect to achieve from the acquisition of RMI within the timeframe that is
currently expected, or at all.
Strategic
transactions like our acquisition of RMI create numerous uncertainties and
risks. As a result, the combined company may not be able to realize the expected
revenue growth and other benefits and synergies that we sought to achieve from
the acquisition. We believe that the businesses conducted by us and RMI prior to
the merger were complementary in a number of respects and that the combined
company can take advantage of synergies, economies of scale and other benefits
in the following areas, among others:
|
•
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market
expansion;
|
|
•
|
increased
sales to existing customers;
|
|
•
|
product
and technology synergies;
|
|
•
|
operational
and manufacturing synergies;
|
|
•
|
research
and development synergies;
|
|
•
|
expansion
of intellectual property and patent
portfolio;
|
|
•
|
geographic
synergies; and
|
|
•
|
cultural
synergies.
|
However,
these anticipated benefits and synergies are based on projections and
assumptions, not actual experience, and actual results may deviate from our
expectations for a variety of reasons, including those discussed in this
section.
We
may not be successful in our expansion into the current markets for RMI products
and in addressing the new opportunities we expect to arise out of the
combination.
RMI
historically designed and developed high performance, power-optimized processor
solutions for several target markets: infrastructure equipment, enterprise
systems, security and storage appliances, data center systems and industrial and
connected media devices. Because the RMI products serve some different markets
than our products historically did, we did not have experience competing in
these prior to the acquisition. The success of our expansion into these new
markets will depend on a number of factors, including:
|
•
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our
ability to leverage each company’s successes to provide synergistic
solutions to key customers and
applications;
|
|
•
|
our
ability to assimilate and retain key RMI personnel who have expertise in
conducting RMI’s business;
|
|
•
|
our
ability to preserve and grow RMI’s existing customer, distributor and
ecosystem partner relationships;
|
|
•
|
our
ability to design and develop innovative products and solutions in these
new markets and to continue RMI’s success in achieving “design wins” with
key customers;
|
|
•
|
our
ability to provide high quality customer services and support;
and
|
|
•
|
our
ability to compete effectively against a larger number and broader range
of competitors resulting from our entry into new
markets.
|
In
addition to the current markets for RMI products, we believe that the combined
company is poised to address new opportunities in areas such as high-performance
switching and routing control plane processing and the high-volume, ultra
low-power embedded processing market for enterprise, industrial and connected
media applications. If we are unsuccessful in expanding into these new market
opportunities, we may not achieve the sales and revenue growth we had expected
from the acquisition.
There
is no assurance that we will be able to continue or expand upon RMI’s past
success with customer design wins following the acquisition.
RMI achieved
strategic design wins at a wide range of leading customers such as
Alcatel-Lucent, Aruba, CheckPoint, Cisco, Datang Mobile, Dell, Fujitsu, HP,
Huawei, Huawei-Symantec, Hangzhou H3C Technologies Co. Ltd, IBM, Juniper, LG,
McAfee, Motorola, NEC, Samsung, Sun and ZTE, among others. There is no assurance
that we will be able to replicate or improve upon RMI’s success in obtaining
design wins from these and other customers following the acquisition. This
uncertainty is compounded by the fact that RMI does not have long-term
commitments from any of its existing customers. These product design processes
can be lengthy, as the customers of RMI products usually require a comprehensive
technical evaluation of its products before they incorporate them into their
designs. If a customer’s system designer initially chooses a competitor’s
product, it becomes significantly more difficult to sell RMI’s products for use
in that system because changing suppliers can involve significant cost, time,
effort and risk for RMI’s customers. Our failure to win a competitive design
opportunity can result in foregoing revenues from a given customer’s product
line for the life of that product. In addition, design opportunities may be
infrequent or may be delayed. We expect to invest significant time and resources
and to incur significant expenses to design RMI products to ensure compliance
with relevant specifications, but even with these efforts we may have limited
success in securing customer design wins for a number of reasons, including our
management’s lack of experience with the markets served by RMI’s products, our
failure to retain key RMI personnel involved in the customer design process and
our failure to establish employee incentives and otherwise operate the RMI
business in a manner that continues to place high priority on customer design
wins. Our ability to compete in the markets in which RMI competed will depend,
in large part, on our ability to continue to design products to ensure
compliance with RMI customers’ and potential customers’ specifications and to
secure design wins.
Even
if we are successful in achieving customer design wins for RMI products, we may
not realize the revenue growth and other benefits we expect to achieve from the
acquisition.
The
nature of the design process for RMI products requires that significant expenses
be incurred prior to recognizing revenues associated with those expenses, which
may harm our financial results. Even if a customer designs one of RMI’s products
into its product offering, we cannot be assured that its product will be
commercially successful, that we will receive any revenues from that
manufacturer or that a successor design will include an RMI product. As a
result, we may be unable to accurately forecast the volume and timing of orders
and revenues associated with any new product introductions, which could
adversely affect our results of operations. If we are unable to realize the
revenue growth we expect to achieve from customer design wins for RMI products,
we may not achieve the operational results we anticipate following the
acquisition and our business may be adversely impacted.
We
may experience difficulties in transitioning to smaller geometry process
technologies or in achieving higher levels of design integration for the
semiconductor solutions provided by RMI products, which may result in reduced
manufacturing yields, delays in product deliveries, increased expenses and loss
of design wins and sales.
We have
substantial experience in transitioning the manufacturing processes for our
products to each new generation of smaller geometry process technologies and
believes that it will be necessary to migrate RMI’s products to such smaller
geometries as well. Any transition would require us to redesign the applicable
product and require us and our foundry partners to use new or modified
manufacturing processes for the product. The smallest geometry process that RMI
used for any semiconductors is 80 nanometer, but we expect the next generation
semiconductors to be based on a 40 nanometer process. Because of our lack of
experience with the RMI products and technology, we may not be as successful in
migrating these products to smaller geometry process technologies as we have
been with our own products. We will also depend on our relationships with
foundry subcontractors to transition to smaller geometry processes successfully.
If we experience difficulties in transitioning to smaller geometry process
technologies or in achieving higher levels of design integration for RMI
products, we may experience reduced manufacturing yields, delays in product
deliveries, increased expenses and loss of design wins and sales, any of which
could prevent us from realizing the anticipated benefits from the
acquisition.
We
expect to rely on third-party technologies for the development of the RMI
products, and our inability to use these technologies in the future could harm
our ability to compete in the markets for these products.
We rely
on third parties for technologies that are integrated into the RMI products,
such as wafer fabrication and assembly and test technologies used by its
contract manufacturers, as well as licensed MIPS architecture technologies. If
we are unable to continue to use or license these technologies on reasonable
terms, or if these technologies fail to operate properly following the
acquisition, we may not be able to secure alternatives in a timely manner, and
our ability to remain competitive in the markets served by these products would
be harmed. In addition, the MIPS license requires that certain improvements be
made available to the community of all of MIPS’ licensees, which could
conceivably reduce the proprietary advantage that we will have with this
architecture. If we are unable to license technology from third parties on
commercially reasonable terms in order to continue to develop current products
or to develop future products for the markets served by the RMI products, we may
not be able to develop these products in a timely manner or at all.
Our
operating results will depend in part on the growth of developing sectors of the
connected media market historically served by RMI.
The RMI
business has been highly dependent on developing sectors of the connected media
market, including portable media players, personal navigation devices,
automobile infotainment devices and home media players. The connected media
market is highly competitive and is characterized by, among other things,
frequent introductions of new products and short product life cycles. If the
target markets for the RMI products within these markets do not grow as rapidly
or to the extent anticipated, the combined company’s business could suffer. RMI
derived a significant portion of its revenues from the sale of its semiconductor
solutions for use in emerging connected media applications. Our ability to
sustain and increase revenue is in large part dependent on the continued growth
of these rapidly evolving market sectors, whose future is largely uncertain.
Many factors could impede or interfere with the expansion of these connected
media market sectors, including a slowdown in overall consumer spending,
consumer demand in these sectors, general economic conditions, other competing
consumer electronic products and insufficient interest in new technology
innovations. Any of these dynamics in the consumer electronics market could harm
future sales of the RMI products and prevent us from realizing the anticipated
benefits of our acquisition of RMI.
We
are subject to governmental export and import controls that could subject us to
liability or impair our ability to compete in foreign markets.
Because
we incorporate encryption technology into our multi-core
products, some of these products are subject to United States
export controls and may be exported outside the United States only with the
required level of export license or through an export license exception. In
addition, various countries regulate the import of certain encryption technology
and have enacted laws that could limit our ability to introduce products or
could limit our customers’ ability to implement our products in those countries.
Changes in our products or changes in export and import regulations may create
delays in the introduction of our products in international markets, prevent our
customers with international operations from deploying our products throughout
their global systems or, in some cases, prevent the export or import of our
products to certain countries altogether. Any change in export or import
regulations or related legislation, shift in approach to the enforcement or
scope of existing regulations, or change in the countries, persons or
technologies targeted by such regulations, could result in decreased use of our
products by, or an inability to export or sell our products to, existing or
prospective customers with international operations and harm our
business.
RISKS
RELATING TO OUR COMMON STOCK
In
connection with our acquisition of RMI in October 2009, we issued a substantial
number of shares of common stock around the time of closing and we may be
required to additional shares before December 31, 2010, which would further
dilute the ownership interests of our other stockholders.
In connection
with the acquisition of RMI, we issued or reserved for issuance 5.0 million
shares of our common stock at closing as merger consideration to RMI
stockholders and as incentive stock awards to RMI employees. We may be required
issue up to 1.6 million additional shares to former RMI stockholders as earn-out
consideration before December 31, 2010, if the maximum earn-out is
achieved. Our issuance of additional shares of common stock as earn-out
consideration may result in substantial percentage dilution of the ownership
interests of our other stockholders at that time. Our issuance of shares in
connection with the RMI acquisition also may have an adverse impact on our net
earnings per share in fiscal periods that include (or follow) the date of the
acquisition, as we anticipate that the transaction will be dilutive on the basis
of net earnings per common share for the foreseeable future following the
acquisition.
The
price of our stock could decrease as a result of shares being sold in the
market, including sales by former RMI stockholders who received shares in
connection with our acquisition of RMI.
Sales of a
substantial number of shares of common stock in the public market could
adversely affect the prevailing market price of our common stock from time to
time. Substantially all the shares of our common stock currently outstanding are
eligible for sale in the public market but sales by our affiliates will be
subject to conditions of Rule 144 (other than holding period requirements)
including the volume restrictions set forth in SEC Rule 144(e).
Additionally,
as the shares of common stock we issued in our acquisition of RMI become
eligible for resale, the sale of those shares could adversely impact our stock
price. All of the shares of our common stock issued as merger consideration on
the closing date are subject to a complete trading lock-up through
April 30, 2010, and 50% of those shares will be subject to a complete
trading lock-up through October 30, 2010. In addition, 50% of the
restricted stock units that we issued to certain RMI employees at closing will
vest on April 30, 2010 and the remaining 50% will vest on October 30,
2010. These equity incentive shares will be registered and will therefore
generally not be subject to resale restrictions under federal securities laws.
Accordingly, a substantial number of shares of our common stock will become
eligible for resale on April 30 and October 30, 2010. Our stock price
may suffer a significant decline as a result of the sudden increase in the
number of shares sold in the public market or market perception that the
increased number of shares available for sale will exceed the demand for our
common stock.
Our
stock price could drop, and there could be significantly less trading activity
in our stock, if securities or industry analysts downgrade our stock or do not
publish research or reports about our business.
Our stock
price and the trading market for our stock are likely to be affected
significantly by the research and reports concerning our company and our
business which are published by industry and securities analysts. We do not have
any influence or control over these analysts, their reports or their
recommendations. Our stock price and the trading market for our stock could be
negatively affected if any analyst downgrades our stock, publishes a report
which is critical of our business, or discontinues coverage of us.
Our
common stock has experienced substantial price volatility.
Our common
stock has experienced substantial price volatility. Such volatility may occur in
the future, particularly because of quarter-to-quarter variations in our actual
or anticipated financial results, or the reported financial results of other
semiconductor companies or our customers. Stock price volatility may also result
from product announcements by us or our competitors, or from changes in
perceptions about the various types of products we manufacture and sell. In
addition, our stock price may fluctuate due to price and volume fluctuations in
the stock market, especially in the technology sector.
Provisions
of our certificate of incorporation and bylaws, Delaware law and customer
agreements might delay or prevent a change of control transaction and depress
the market price of our stock.
Various
provisions of our certificate of incorporation and bylaws might have the effect
of making it more difficult for a third party to acquire, or discouraging a
third party from attempting to acquire, control of us. These provisions could
limit the price that certain investors might be willing to pay in the future for
shares of our common stock. Certain of these provisions eliminate cumulative
voting in the election of directors, limit the right of stockholders to call
special meetings and establish specific procedures for director nominations by
stockholders and the submission of other proposals for consideration at
stockholder meetings.
We are also
subject to provisions of Delaware law which could delay or make more difficult a
merger, tender offer or proxy contest involving us. In particular,
Section 203 of the Delaware General Corporation Law prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years unless specific conditions are met.
Any of these provisions could have the effect of delaying, deferring or
preventing a change in control, including, without limitation, discouraging a
proxy contest or making more difficult the acquisition of a substantial
block of our common stock.
Our board of
directors might issue up to 50,000,000 shares of preferred stock without
stockholder approval on such terms as the board might determine. The rights of
the holders of common stock will be subject to, and might be adversely affected
by, the rights of the holders of any preferred stock that might be issued in the
future.
Under our
master purchase agreements with Cisco, in the event of, among other things, the
transfer of at least 50% of our voting control to a Cisco competitor that
generates less than 50% of its annual sales from integrated circuit products,
Cisco may exercise rights to purchase our knowledge-based processors directly
from our manufacturers, subject to payments to us. This provision may discourage
or complicate attempts by some third parties to acquire us.
Our
stockholder rights plan could prevent stockholders from receiving a premium over
the market price for their shares from a potential acquirer.
We adopted a
stockholder rights plan that generally entitles our stockholders to rights to
acquire additional shares of our common stock when a third party acquires 15.0%
of our common stock or commences or announces its intent to commence a tender
offer for at least 15.0% of our common stock, other than for certain
stockholders that were stockholders prior to our initial public offering as to
whom this threshold is 20.0%. This plan could delay, deter or prevent an
investor from acquiring us in a transaction that could otherwise result in
stockholders receiving a premium over the market price for their shares of
common stock.
We
may need to obtain financing in order to fund our growth strategy.
We believe
that we have or will have access to capital sufficient to satisfy our working
capital requirements for at least the next 12 months. However, it may become
necessary for us to raise additional funds to support our growth. We cannot
assure you that we will be able to obtain financing when needed or that, if
available to us, the terms will be acceptable to us. If we issue equity
securities in any financing, the new securities may have rights and preferences
senior to our shares of common stock, and the ownership interest in us of our
current stockholders will be proportionately reduced. If we issued debt
securities, they will rank senior to all equity securities. If we are unable to
raise additional capital, we may not be able to implement our growth strategy,
and our business could be harmed significantly. Our future capital requirements
will depend on many factors, including the amount of revenue we generate, the
timing and extent of spending to support product development efforts, the
expansion of sales and marketing activities, the timing of introductions of new
products, the costs to ensure access to adequate manufacturing capacity, and the
continuing market acceptance of our products, and any future business
acquisitions that we might undertake. However, if we do not meet our plan, we
could be required, or might elect, to seek additional funding through public or
private equity or debt financing and additional funds may not be available on
terms acceptable to us or at all. We also might decide to raise additional
capital at such times and upon such terms as management considers favorable
and in the interests of the Company. We may sell up to approximately an
additional $120 million of our debt and/or equity securities (before reductions
for expenses, underwriting discounts and commissions) under our existing shelf
registration statement on Form S-3 which may result in an increase in the number
of shares and decline in earnings per share. We may sell these securities from
time-to-time without prior announcement.
EXECUTIVE
OFFICERS OF THE REGISTRANT
The following
table provides the names, ages and offices of each of our executive officers as
of January 31, 2010:
|
Title
|
Age
|
Position
|
|||
|
Ronald
Jankov
|
51 |
Director,
Chief Executive Officer and President
|
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|
Behrooz
Abdi
|
48 |
Executive
Vice President and General Manager
|
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|
Michael
Tate
|
44 |
Vice
President and Chief Financial Officer
|
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|
Marcia
Zander
|
46 |
Senior
Vice President of Worldwide Sales
|
|||
|
Varadarajan
Sirnivasan
|
58 |
Vice
President of Product Development and Chief Technical
Officer
|
|||
|
Dimitrios
Dimitrelis
|
52 |
Vice
President of Engineering
|
|||
|
Mozfar
Maghsoudnia
|
43 |
Vice
President of Worldwide Manufacturing
|
|||
|
Ibrahim
Korgav
|
61 |
Senior
Vice President of Worldwide Business Operations
|
|||
|
Chris
O'Reilly
|
36 |
Vice
President of Marketing
|
|||
|
Roland
Cortes
|
44 |
Vice
President, General Counsel and
Secretary
|
|||
Ronald Jankov
has served as our President, Chief Executive Officer and as a member of our
board of directors since April 2000.
Behrooz Abdi
has served as our Executive Vice President and General Manager in charge of our
MPS/CPS business since November 2009. From November 2007 to October 2009, Mr.
Abdi was President and Chief Executive Officer of RMI Corporation. From March
2004 to November 2007, Mr. Abdi was Senior Vice President and General
Manager of Qualcomm CDMA Technologies at Qualcomm, Inc. Prior to
Qualcomm, Mr. Abdi held leadership and engineering positions at Motorola in its
Semiconductor Products Sector, now Freescale Semiconductor, Inc. His
last role at Motorola was Vice President and General Manager for the Radio
Products Division from July 1985 to December 2003.
Michael Tate
has served as our Vice President of Finance and Chief Financial Officer since
July 2007. Prior to joining us, Mr. Tate was interim chief financial
officer, vice president, corporate controller, and treasurer at Marvell
Technology Group Ltd. He joined Marvell in January 2001 as part of
Marvell’s acquisition of Galileo Technology Ltd.
Marcia Zander
has served as our Senior Vice President of Worldwide Sales since January 2006
and Vice President of Sales since July 1999.
Varadarajan
Srinivasan has served as our Vice President of Product Development since
March 1996, as our Chief Technical Officer since August 2000.
Dimitrios
Dimitrelis has served as our Vice President of Engineering since July
2002. From July 1999 to March 2002, Mr. Dimitrelis was Director of
Engineering for Vitesse Semiconductor Corp., a communications integrated circuit
company, where he was primarily responsible for the development of a 10G network
processor.
Mozafar
Maghsoudnia has served as our Vice President of Worldwide Manufacturing
since January 2007, as Vice President of Manufacturing since August 2006, and
Director of Technology since June 2003. From June 1988 to June 2003,
Mr. Maghsoudnia was employed by Analog Devices, Inc., where he was
responsible for wafer fabrication and technology in his last
assignment.
Ibrahim Korgav
has served as our Senior Vice President of Worldwide Business Operations since
January 2007 and as our Senior Vice President of Manufacturing and Business
Operations from March 2002 to January 2007.
Chris O’Reilly
has served as our Vice President of Marketing since August 2007. Prior to August
2007, Mr. O’Reilly served as our senior director of marketing, director of
sales for the Asia Pacific region and senior marketing manager since
1999.
Roland Cortes
has served as our Vice President, General Counsel and Secretary since April
2007. Prior to April 2007, Mr. Cortes served as our Secretary since May
2004, as our Senior Director of Legal Affairs and IP Management since July 2002,
and as our Director of Legal Affairs and IP Management since April
1999.
Not
applicable.
The following
table sets forth the location, and approximate square footage of each of the
principal properties used by us during 2009. All properties are leased under
operating leases which expire at various times through 2015.
|
Location
|
Approximate
Square
Footage
|
|||
|
Mountain
View, California, USA
|
42,000 | |||
|
Cupertino,
California, USA
|
51,597 | |||
|
Austin,
Texas, USA
|
15,630 | |||
|
Banglore,
India
|
20,860 | |||
In addition,
we lease office spaces in Toulouse, France, Beijing, Shanghai, Nanjing, and
Shenzhen, China, Taipei and Hsinchu, Taiwan, Seoul, Korea, Tokyo, Japan, and
Mumbai, India. We believe that these facilities are adequate for our current
needs and that suitable additional or substitute space will be available as
needed to accommodate foreseeable expansion of our operations.
We are not
involved in any legal proceedings that management believes will have a material
adverse effect our business, results of operations, financial position or cash
flows.
On October 23, 2009,
we held an special meeting of our stockholders. The stockholders
approved the
issuance of a maximum of 13,080,000 shares of our common stock as merger
consideration and to new employees in connection with the proposed acquisition
of RMI by the votes set forth below:
|
For
|
Against
|
Abstentions
|
Broker Non-Votes
|
|||
|
19,783,613
|
32,964
|
16,462
|
0
|
PART
II
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
Market
Information for Common Stock
Our common
stock is traded on the Global Select Market of the NASDAQ Stock Market under the
symbol “NETL”. The following table sets forth, for the periods indicated, the
intra-day high and low per share sale prices of our common stock, as reported on
the Global Select Market.
|
Price
Range Per Share
|
||||||||
|
High
|
Low
|
|||||||
|
Fiscal
2009
|
||||||||
|
Fourth
quarter
|
$ | 48.00 | $ | 36.87 | ||||
|
Third
quarter
|
$ | 46.80 | $ | 32.36 | ||||
|
Second
quarter
|
$ | 38.50 | $ | 26.77 | ||||
|
First
quarter
|
$ | 28.57 | $ | 19.68 | ||||
|
Fiscal
2008
|
||||||||
|
Fourth
quarter
|
$ | 30.45 | $ | 14.42 | ||||
|
Third
quarter
|
$ | 39.10 | $ | 26.98 | ||||
|
Second
quarter
|
$ | 40.26 | $ | 23.44 | ||||
|
First
quarter
|
$ | 32.90 | $ | 20.15 | ||||
Holders
As of January
31, 2009, there were approximately 152 holders of record (not including
beneficial holders of stock held in street names) of our common
stock.
Dividend
Policy
We have not
declared or paid cash dividends on our common stock and do not anticipate paying
any cash dividends in the foreseeable future. We expect to retain future
earnings, if any, to fund the development and growth of our business. Our board
of directors will determine future dividends, if any. Under a credit agreement
dated June 19, 2009 with a syndication of banks, we are prohibited from the
declaration and payment of cash dividends.
On February 16,
2010, the Board of Directors approved a two-for-one stock split of our common
stock, to be effected pursuant to the issuance of additional shares as a stock
dividend. The stock dividend is payable on March 19, 2010 to stockholders of
record as of March 5, 2010.
Securities
Authorized for Issuance Under Equity Compensation Plans
See
Item 12 of Part III of this Report regarding information about securities
authorized for issuance under our equity compensation plans.
Performance
Graph
The following
graph shows the 5 years cumulative total stockholder return (change in stock
price plus reinvested dividends) assuming the investment of $100 on December 31,
2004 in each of the Company’s common stock, the S&P 500 Index and the
Philadelphia Semiconductor Index. The comparisons in the table are required by
the SEC and are not intended to forecast or be indicative of possible
future performance of the Company’s common stock.
COMPARISON
OF 5 YEARS CUMULATIVE TOTAL RETURN
Among
NetLogic Microsystems, Inc., the S&P 500 Index
and the
Philadelphia Semiconductor Index
|
Cumulative
Total Returns
|
||||||||||||||||||||||||
|
12/31/2004
|
12/31/2005
|
12/31/2006
|
12/31/2007
|
12/31/2008
|
12/31/2009
|
|||||||||||||||||||
|
NetLogic
Micrsosystems, Inc.
|
$ | 100.00 | $ | 272.40 | $ | 216.90 | $ | 322.00 | $ | 220.10 | $ | 462.60 | ||||||||||||
|
S&P
500 Index
|
$ | 100.00 | $ | 103.00 | $ | 117.03 | $ | 121.16 | $ | 74.53 | $ | 92.01 | ||||||||||||
|
Philadelphia
Semiconductor
Index
|
$ | 100.00 | $ | 110.66 | $ | 107.78 | $ | 94.17 | $ | 48.96 | $ | 83.06 | ||||||||||||
Recent Sales of Unregistered
Securities
On October
30, 2009, we completed the acquisition of RMI and issued a total of 5.0
million shares of common stock to the holders of preferred stock of RMI,
including shares withheld for escrow as security for RMI’s indemnity obligations
and for estimated expenses of escrow. Pursuant to the terms of the
merger agreement for the RMI acquisition we also became obligated for the
contingent issuance of a maximum of approximately 1.6 million
additional shares of common stock subject to the achievement of earn-out
milestones for revenues generated from the products acquired from RMI during a
12-month period following the closing date of the acquisition. No
underwriters were involved in the transaction. We issued and agreed
to issue these shares in a merger exchange transaction exempt from the
registration requirements under section 5 of the Securities Act of 1933 pursuant
to Section 4(2) and Rule 506 under Regulation D.
The following
selected consolidated financial data are qualified by reference to, and should
be read in conjunction with, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the Financial Statements and related
Notes included in Item 8 of this report, which discusses factors affecting
the comparability of such financial data.
The selected
balance sheet data as of December 31, 2009 and 2008 and selected statements
of operations data for the years ended December 31, 2009, 2008 and 2007 are
derived from our audited financial statements included elsewhere in this report.
The selected balance sheet data as of December 31, 2007, 2006 and 2005 and
the selected statements of operations data for the years ended December 31,
2006 and 2005 were derived from audited financial statements not included in
this report. Our historical results are not necessarily indicative of our future
results.
|
Year
Ended December 31,
|
||||||||||||||||||||
|
2009
|
2008
|
2007
|
2006
|
2005
|
||||||||||||||||
|
(in
thousands, except per share data)
|
||||||||||||||||||||
|
Statements
of Operations Data:
|
||||||||||||||||||||
|
Revenue
|
$ | 174,689 | $ | 139,927 | $ | 109,033 | $ | 96,806 | $ | 81,759 | ||||||||||
|
Cost
of revenue
|
99,251 | 61,616 | 44,732 | 36,762 | 33,415 | |||||||||||||||
|
Gross
profit
|
75,438 | 78,311 | 64,301 | 60,044 | 48,344 | |||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||
|
Research
and development
|
73,631 | 51,607 | 45,175 | 36,578 | 21,939 | |||||||||||||||
|
Selling,
general and administrative
|
43,931 | 26,567 | 19,672 | 15,455 | 10,936 | |||||||||||||||
|
Change
in contingent earn-out liability
|
2,008 | - | - | - | - | |||||||||||||||
|
Acquisition-related
costs
|
5,412 | - | - | - | - | |||||||||||||||
|
In-process
research and development
|
- | - | 1,610 | 10,700 | - | |||||||||||||||
|
Total
operating expenses
|
124,982 | 78,174 | 66,457 | 62,733 | 32,875 | |||||||||||||||
|
Income
(loss) from operations
|
(49,544 | ) | 137 | (2,156 | ) | (2,689 | ) | 15,469 | ||||||||||||
|
Interest
income
|
992 | 1,595 | 4,431 | 3,737 | 1,568 | |||||||||||||||
|
Interest
expense
|
(1,666 | ) | (33 | ) | - | (203 | ) | |||||||||||||
|
Other
income and expense, net
|
(4 | ) | (59 | ) | 32 | 3 | (16 | ) | ||||||||||||
|
Income
(loss) before income taxes
|
(50,222 | ) | 1,640 | 2,307 | 1,051 | 16,818 | ||||||||||||||
|
Provision
for (benefit from) income taxes
|
(3,060 | ) | (1,937 | ) | (288 | ) | 459 | 379 | ||||||||||||
|
Net
income (loss)
|
$ | (47,162 | ) | $ | 3,577 | $ | 2,595 | $ | 592 | $ | 16,439 | |||||||||
|
Net
income (loss) per share - basic
|
$ | (2.04 | ) | $ | 0.17 | $ | 0.13 | $ | 0.03 | $ | 0.93 | |||||||||
|
Net
income (loss) per share - diluted
|
$ | (2.04 | ) | $ | 0.16 | $ | 0.12 | $ | 0.03 | $ | 0.87 | |||||||||
|
Shares
used in calculation - basic
|
23,091 | 21,472 | 20,747 | 19,758 | 17,725 | |||||||||||||||
|
Shares
used in calculation - diluted
|
23,091 | 22,314 | 21,938 | 21,107 | 18,992 | |||||||||||||||
|
December
31,
|
||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
|
(in
thousands)
|
||||||||||||||||||||
|
Balance
Sheet Data:
|
||||||||||||||||||||
|
Cash
and cash equivalents and short-term investments
|
$ | 44,278 | $ | 96,541 | $ | 50,689 | $ | 89,879 | $ | 65,788 | ||||||||||
|
Working
capital
|
66,790 | 87,853 | 63,956 | 95,986 | 65,162 | |||||||||||||||
|
Total
assets
|
532,111 | 245,771 | 203,151 | 157,769 | 85,529 | |||||||||||||||
|
Software
licenses and other obligations
|
5,446 | 1,219 | 2,528 | 2,625 | 687 | |||||||||||||||
|
Stockholders'
equity
|
425,955 | 200,267 | 171,888 | 142,524 | 68,656 | |||||||||||||||
The selected
consolidated financial data presents financial information in the relevant
periods for the acquisition of the IDT NSE business in mid-July 2009, the
acquisition of RMI Corp. completed in late October 2009, the acquisition of the
TCAM2 and TCAM-CR network search engine products and certain related assets from
Cypress Semiconductor Corp. in August 2007, the acquisition of Aeluros, Inc.
completed in late October 2007, and the acquisition of NSE Business from Cypress
Semiconductor Corp. completed in February 2006. See Note 2 of Notes to
Consolidated Financial Statements under Item 8 of this Annual Report on
Form 10-K for further discussion of these acquisitions. The coparability of the
data in the table above is affected by our adoption of various new accounting
guidance in the periods presents, specifically, those related to business
combinations, stock compensation and income taxes.
Overview
We are a
leading fabless semiconductor company that designs, develops and sells
proprietary high-performance processors and high speed integrated circuits that
are used to enhance the performance and functionality of advanced 3G/4G mobile
wireless infrastructure, data center, enterprise, metro Ethernet, edge and core
infrastructure networks. Our market-leading product portfolio
includes high-performance multi-core processors, knowledge-based processors,
high-speed 10/40/100 Gigabit Ethernet physical layer devices, network search
engines, and ultra low-power embedded processors. These products are
designed into high-performance systems such as switches, routers, wireless base
stations, radio network controllers, security appliances, networked storage
appliances, service gateways and connected media devices offered by leading
original equipment manufacturers (OEMs) such as AlaxalA Networks Corporation,
Alcatel-Lucent, ARRIS Group, Inc., Brocade Communications
Systems, Inc., Cisco Systems, Inc., Dell Inc., Ericsson, Fortinet,
Inc., Fujitsu Limited, Hangzhou H3C Technologies Co. Ltd, Hitachi, Ltd., Huawei
Technologies Co., Ltd., Huawei Symantec Technologies Co.,Ltd , IBM Corporation,
Juniper Networks, Inc., LG Electronics, Inc., Motorola, Inc., NEC Corporation,
Samsung Electronics, Sun Microsystems, Inc., Tellabs, and ZTE
Corporation.
The products
and technologies we have developed and acquired are targeted to enable our
customers to develop systems that support the increasing speeds and complexity
of the Internet infrastructure. We believe there is a growing need to include
multi-core processors, knowledge-based processors, and high speed physical layer
devices in a larger number of such systems as networks transition to all
Internet Protocol (IP) packet processing at increasing speeds and
complexity.
The equipment
and systems that use our products are technically complex. As a result, the time
from our initial customer engagement design activity to volume production can be
lengthy and may require considerable support from our design engineering,
research and development, sales, and marketing personnel in order to secure the
engagement and commence product sales to the customer. Once the customer’s
equipment is in volume production, however, it generally has a life cycle of
three to five years and requires less ongoing support.
We derive
revenue primarily from sales of semiconductor products to OEMs, their contract
manufacturers and distributors. Usually, we sell the initial shipments of a
product for a new design engagement directly to the OEM customer. Once the
design enters volume production, the OEM frequently outsources its manufacturing
to contract manufacturers who purchase the products directly from
us.
We also use
distributors to provide valuable assistance to end-users in delivery of our
products and related services. In accordance with standard market practice, our
distributor agreements limit the distributor’s ability to return product up to a
portion of purchases in the preceding quarter and limit price protection for
inventory on-hand if it subsequently lowers prices on our
products. We recognize sales through distributors at the time of
shipment to end customers.
As a fabless
semiconductor company, our business is less capital intensive than others
because we rely on third parties to manufacture, assemble, and test our
products. In general, we do not anticipate making significant capital
expenditures aside from business acquisitions that we might make from time to
time. In the future, as we launch new products or expand our operations,
however, we may require additional funds to procure product mask sets, order
elevated quantities of wafers from our foundry partners, perform qualification
testing and assemble and test those products.
Because we
purchase all wafers from suppliers with fabrication facilities and outsource the
assembly and testing to third party vendors, a significant portion of our costs
of revenue consists of payments to third party vendors.
Recent
Acquisitions
On
October 30, 2009, we completed the acquisition of RMI, a provider of
high-performance and low-power multi-core, multi-threaded processors. Pursuant
to the Agreement and Plan of Merger Reorganization by and among us, Roadster
Merger Corporation, RMI Corporation and WP VIII Representative LLC dated as of
May 31, 2009, or the merger agreement, on October 30, 2009, Roadster
Merger Corporation was merged with and into RMI, and we delivered merger
consideration of approximately 5.0 million shares of our common stock and
$12.6 million cash to the paying agent for distribution to the holders of RMI
capital stock. Approximately 10% of the shares of our common stock are being
held in escrow as security for claims and expenses that might arise during the
first 12 months following the closing date. The closing price of a share of our
common stock on October 30, 2009 was $38.01.
We may be
required to issue and deliver up to an additional 1.6 million shares of
common stock and pay an additional $15.9 million cash to the former holders of
RMI capital stock as earn-out consideration based upon achieving specified
percentages of revenue targets for either the 12-month period from
October 1, 2009 through September 30, 2010, or the 12-month period
from November 1, 2009 through October 31, 2010, whichever period
results in the higher percentage of the revenue target. The additional earn-out
consideration, if any, net of applicable indemnity claims, will be paid on or
before December 31, 2010.
On
July 17, 2009, we completed the IDT NSE acquisition. The acquisition was
accounted for as a business combination during the third quarter of fiscal 2009.
As purchase consideration we paid $98.2 million in cash, net of a price
adjustment based on a determination of the actual amount of inventory
received.
On
October 24, 2007, we completed the merger and acquisition of Aeluros, Inc.
which we refer to as the “Aeluros Acquisition”. The acquisition was accounted
for as a business combination during the fourth quarter of fiscal 2007. We paid
$57.1 million in cash upon the closing of the transaction in exchange for all of
the outstanding equity securities of Aeluros. We reserved 104,000 shares of
common stock for future issuance upon the exercise of unvested employee stock
options of Aeluros that we assumed and are subject to continued employment
vesting requirements. In addition, under the terms of the definitive agreement,
we paid $15.5 million cash in February 2009 based on the attainment of revenue
performance milestones for the acquired business during the one year period
following the close of the transaction.
Our results
of operations for 2009 reflect two months of revenues subsequent to the RMI
acquisition and five and one-half months of revenue subsequent to the IDT NSE
acquisition. Revenues in the second half of 2009, included $16.3
million attributable to the IDT NSE acquisition and $14.5 million of revenue
attributable to the RMI acquisition. The last quarter of 2009 also
included operating costs associated with an additional 269 employees from the
RMI acquisition. Results of operations in 2010 will reflect a full
year of revenues and costs attributable to both acquisitions and consequently
will be substantially higher than comparable period results in
2009.
Outlook
and Challenges
Our
year-over-year revenue increased from $139.9 million for the year ended December
31, 2008 to $174.7 million for the year ended December 31, 2009. In
early 2009, in light of a volatile macro-economic environment and a decrease in
demand, we focused on operating efficiencies and containing our cash operating
expense growth During the second half of 2009 we experienced an
increase in sequential quarterly revenue growth. Our quarterly
revenues grew from $32.5 million in the second quarter of 2009 to $42.3 million
in the third quarter of 2009 to $69.5 million in the fourth quarter of
2009. The sequential increase in our quarterly revenues was due to a
combination of an improvement in the macroeconomic environment as well as
increased demand for our products as result of new customer programs being
introduced into the market utilizing our products and new revenues from our
acquisitions. Given the resumption of our revenue growth, for 2010 we
have shifted from focusing on containing our cash operating expenses to
strategically investing in our product development and scaling our business
operations to support our growth as well as the continued succesful integration
of the IDT NSE business and RMI. Our continued integration efforts
include, the assimilation of employees; retaining key personnel; process and
system rationalization related to our management information and enterprise
resource planning systems to keep in pace with our breadth and scale of
business, while maintaining regulatory compliance; and keeping existing
customers and obtaining new customers.
For the years
ended December 31, 2009, 2008, and 2007, our top five customers in terms of
revenue accounted for approximately 68%, 68%, and 79% of total product revenue,
respectively. Although we believe our revenues will continue to be concentrated
with our significant customers, we expect continued favorable market trends,
such as the increasing number of 10 Gigabit ports as enterprises and datacenters
upgrade their legacy networks to better accommodate the proliferation of video
and virtualization applications, and the growing mobile wireless infrastructure
and IPTV markets, will enable us to broaden our customer base.
Additionally, our expanding product portfolio will also help us further
diversify our customer and product revenues as well as expanding our product
portfolio with our existing customers.
Cisco
Business
Cisco and its
contract manufacturers have accounted for a large percentage of our historical
revenue. At Cisco’s request, in 2007, we transitioned into a just-in-time
inventory arrangement covering substantially all of our product shipments to
Cisco and its contract manufacturers. Pursuant to this arrangement we deliver
products to Wintec Industries (“Wintec”) based on orders they place with us, but
we do not recognize product revenue unless and until Wintec reports that it has
delivered the product to Cisco or its contract manufacturer to incorporate into
its end products. Given this arrangement, unless Cisco or its contract
manufacturers take possession of our products from Wintec in accordance with the
schedules provided to us, our predicted future revenue stream could vary
substantially from our forecasts, and our results of operations could be
materially and adversely affected. Additionally, because we own the inventory
physically located at Wintec until it is shipped to Cisco and its contract
manufacturers, our ability to effectively manage inventory levels may be
impaired, causing our total inventory levels to increase. This, in turn,
could increase our expenses associated with excess and obsolete product and
negatively impact our cash flows. For the years ended December 31, 2009, 2008
and 2007, our revenues from Cisco and Cisco’s contract manufactures were $61.7
million, $52.7 million and $55.1 million or approximately 35%, 38%, and 50% of
total revenue.
Critical Accounting Policies and Estimates
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the U.S. requires management to make
fair and reasonable estimates and assumptions that affect reported amounts of
assets, liabilities and operating expenses during the period reported. The
following accounting policies require management to make estimates and
assumptions. These estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the period they are determined to be
necessary. If actual results differ significantly from management’s estimates,
our financial statements could be materially impacted. Our estimates are guided
by observing the following critical accounting policies.
Revenue
Recognition. We derive our revenue primarily from sales of semiconductor
products. We recognize revenue when all of the following criteria have been met:
(i) persuasive evidence of a binding arrangement exists, (ii) delivery
has occurred, (iii) the price is deemed fixed or determinable and free of
contingencies and significant uncertainties, and (iv) collection is
probable. The price is considered fixed or determinable at the execution of an
agreement, based on specific products and quantities to be delivered at
specified prices, which is often memorialized with a customer purchase order. We
assess the ability to collect from our customers based on a number of factors,
including credit worthiness and any past transaction history of the
customer.
Shipping
charges billed to customers are included in product revenue and the related
shipping costs are included in cost of revenue. We recognize revenue at the time
of shipment to OEM customers, their contract manufacturers and our international
sales representatives. Revenue consists primarily of sales of the Company’s
products to OEMs, their contract manufacturers or distributors. Initial sales of
the Company’s products for a new design are usually made directly to OEMs as
they design and develop their product. Once their design enters production, they
often outsource their manufacturing to contract manufacturers that purchase the
Company’s products directly from the Company or from the Company’s
distributors
Product
revenue and costs relating to sales made through distributors with rights of
return and price credits are deferred until the distributors sell the product to
end customers because the selling price is not fixed and determinable and we are
not able to estimate future returns. Revenue recognition depends on notification
from the distributor that product has been sold to an end
customers. On each reporting date the Company records a reduction in
accounts receivable and deferred revenue based on the Company's estimate of the
margin to be ultimately recognized upon sale of the product to an end
customer
We entered
into a purchase agreement with Wintec who has become the primary purchaser of
our products on a consignment basis for resale to Cisco and its contract
manufacturers. We generally recognize revenue when Wintec ships our product to
Cisco or its contract manufacturers.
Inventory Valuation
and Adverse Purchase Commitments. We value our inventories at the
lower of cost or market. We record inventory reserves for estimated obsolescence
or unmarketable inventories based upon assumptions about future demand and
market conditions. These estimates are generally based on a 12-month forecast
prepared by management. Once a reserve is established, it is maintained until
the product to which it relates is sold or otherwise disposed of. If actual
market conditions are less favorable than those expected by management,
additional adjustment to inventory valuation may be required. The carrying value
of inventory and the determination of possible adverse purchase commitments are
dependent on our estimate of the yield that will be achieved, or the percent of
good products identified when the product is tested.
Warranty
Accrual. Our products are subject to warranty for a period ranging
from one to five years from the date of sale and we provide for the estimated
future costs of replacement upon shipment of the product in the accompanying
statements of operations. We estimate our warranty accrual based on historical
claims compared to historical revenue and assume that we will have to replace
products subject to a claim.
Allowance for
Doubtful Accounts. In order to determine the collectability of our
accounts receivable, we continually assess factors such as previous customer
transactions and the credit-worthiness of the customer. To date, our accounts
receivable write-offs have been immaterial. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of certain customers
to make required payments. In general, we establish such allowances for
accounts aged over 90 days from the invoice date, unless specific circumstances
indicate that the balance is collectible.
Accounting for Income
Taxes. We account for income taxes under the provisions of Accounting
Standards Codification (ASC) 740, Income Taxes. In applying ASC740, we are
required to estimate our current tax exposure together with assessing temporary
differences resulting from differing treatments of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities.
Significant management judgment is required to assess the likelihood that our
deferred tax assets will be recovered from future taxable income. During the
third fiscal quarter of 2007, we reassessed the valuation allowance
previously recorded against our net deferred tax assets which consisted
primarily of net operating loss carryforwards and research and development tax
credits. Based on our earnings history and projected future taxable income,
management determined that it was more likely than not that the deferred tax
assets would be realized.
In the first
quarter of fiscal 2007, we adopted ASC 740-10 Income Taxes. As a result,
we recognize liabilities for uncertain tax positions based on the two-step
process prescribed in the interpretation. The first step is to evaluate the tax
position for recognition by determining if the weight of available evidence
indicates that it is more likely than not that the position will be sustained on
audit, including resolution of related appeals or litigation processes, if any.
The second step requires us to estimate and measure the tax benefit as the
largest amount that is more than 50% likely to be realized upon ultimate
settlement. It is inherently difficult and subjective to estimate such amounts,
as we have to determine the probability of various possible outcomes. We
reevaluate these uncertain tax positions on a quarterly basis. This evaluation
is based on factors including, but not limited to, changes in facts or
circumstances, changes in tax law, effectively settled issues under audit, and
new audit activity. Such a change in recognition or measurement would result in
the recognition of a tax benefit or an additional charge to the tax provision.
Refer to Note 7—Income Taxes, of the “ Notes to Consolidated Financial
Statements ” in Item 8 for further
information.
Long-lived Assets and
Intangible Assets. We assess the impairment of long-lived assets and
intangible assets whenever events or changes in circumstances indicate that the
carrying value of such assets may not be recoverable. Whenever events or
changes in circumstances suggest that the carrying amount of long-lived assets
may not be recoverable, we estimate the future cash flows expected to be
generated by the asset from its use or eventual disposition. If the sum of the
expected future cash flows, which includes revenue, is less than the carrying
amount of those assets, we recognize an impairment loss based on the excess of
the carrying amount over the fair value of the assets. Significant management
judgment is required in the forecasts of future operating results that are used
in the discounted cash flow method of valuation.
Goodwill. We
evaluate goodwill for impairment at least on an annual basis or whenever events
and changes in circumstances suggest that the carrying amount may not be
recoverable from its estimated future cash flow. We perform goodwill impairment
test for our single and sole reporting unit. If the fair value of the
reporting unit exceeds the carrying value of the reporting unit, goodwill is not
impaired. We perform the goodwill impairment assessment at the Company level,
which is the sole reporting unit. We performed our annual goodwill impairment
test in the fourth quarter and concluded there was no impairment of goodwill
during the years ended December 31, 2009, 2008 and 2007.
Stock-based
Compensation. We estimate the fair value of stock options using the
Black-Scholes-Merton valuation model (the “Black-Scholes Model”), consistent
with the provisions of ASC 718 Compensation – Stock Compensation. The
Black-Scholes Model requires the input of highly subjective assumptions,
including the option’s expected life, the price volatility of the underlying
stock and future forfeitures and related tax effects. The expected stock price
volatility assumption was determined using a combination of the historical and
implied volatility of the Company’s common stock. Changes in the subjective
assumptions required in the valuation models may significantly affect the
estimated value of the awards, the related stock-based compensation expense and,
consequently, our results of operations.
Results
of Operations
Comparison
of Year Ended December 31, 2009 to Year Ended December 31,
2008
Revenue,
cost of revenue and gross profit
The table
below sets forth the fluctuations in revenue, cost of revenue and gross profit
data for the years ended December 31, 2009 and 2008 (in thousands, except
percentage data):
|
Year
ended
December
31,
2009
|
Percentage
of
Revenue
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Revenue
|
$ | 174,689 | 100.0 | % | $ | 139,927 | 100.0 | % | $ | 34,762 | 24.8 | % | ||||||||||||
|
Cost
of revenue
|
99,251 | 56.8 | % | 61,616 | 44.0 | % | 37,635 | 61.1 | % | |||||||||||||||
|
Gross
profit
|
$ | 75,438 | 43.2 | % | $ | 78,311 | 56.0 | % | $ | (2,873 | ) | -3.7 | % | |||||||||||
Revenue.
Revenue for the year ended December 31, 2009 increased by $34.8 million
compared with that of the year ended December 31, 2008. Revenue from sales
to Wintec, Cisco and Cisco’s contract manufacturers (collectively “Cisco”)
represented $61.7 million of our total revenue for the year ended
December 31, 2009, compared to $52.7 million during the year ended
December 31, 2008. The increase in sales to Cisco was primarily due to an
increase of $8.5 million in revenue from products from our IDT NSE acquisition,
$1.1 million from products from our RMI acquisition, and $9.0 million in revenue
from sales of our new products to Cisco, including the NL7000 and
NL8000. The increase was partially offset by a decrease of $10.4
million in sales of our NL5000 and network search engine
products. Revenue from non-Cisco customers represented $113.0 million
of total revenue for the year ended December 31, 2009 compared with $87.2
million during the year end December 31, 2008. The increase in sales
to non-Cisco customers was primarily due to an increase of $7.8 million in
revenue from products we acquired in the IDT NSE acquisition, $13.3
million from products we acquired in the RMI acquisition, and $16.2 million in
revenue from sales of our new products, including the NL7000 and
NL9000. This increase was partially offset by a decrease of $13.3
million in sales of our NL5000, network search engine products and physical
layer products. During the year ended December 31, 2009 and 2008, Alcatel-Lucent
accounted for 13% of our total revenue compared with 12% in 2008, and Huawei
accounted for 10% of our total revenue and was below 10% in 2008.
Cost of Revenue/Gross
Profit/Gross Margin. Cost of revenue for the year ended December 31,
2009 increased by $37.6 million compared with that of the year ended December
31, 2008. Cost of revenue increased primarily due to the increase in
product sales, amortization of intangible assets, and fair value adjustments
related to acquired inventory. The increases in amortization of
intangible assets and fair value adjustments related to acquired inventory were
attributable to the IDT NSE and RMI acquisitions. Cost of revenue for
the years ended December 31, 2009 and 2008, respectively, included $18.9 million
and $11.9 million of amortization of intangible assets expense, $1.9 million and
$2.4 million of a provision for excess and obsolete inventory, and $20.4 million
and $1.5 million of a fair value adjustment related to acquired inventory.
Gross margin
for the year ended December 31, 2009 decreased by 12.8% compared with 2008,
primarily due to increases in amortization of intangible assets and fair
value adjustments related to acquired inventory.
Operating
expenses
The table
below sets forth operating expense data for the years ended December 31,
2009 and 2008 (in thousands, except percentage data):
|
Year
ended
December
31,
2009
|
Percentage
of
Revenue
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||
|
Research
and development
|
$ | 73,631 | 42.1 | % | $ | 51,607 | 36.9 | % | $ | 22,024 | 42.7 | % | ||||||||||||
|
Selling,
general and administrative
|
43,931 | 25.1 | % | 26,567 | 19.0 | % | 17,364 | 65.4 | % | |||||||||||||||
|
Change
in contingent earn-out liability
|
2,008 | 1.1 | % | - | - | 2,008 | - | |||||||||||||||||
|
Acquisition-related
costs
|
5,412 | 3.1 | % | - | - | 5,412 | - | |||||||||||||||||
|
Total
operating expenses
|
$ | 124,982 | 71.5 | % | $ | 78,174 | 55.9 | % | $ | 46,808 | 59.9 | % | ||||||||||||
Research and
Development Expenses. Research and development expenses increased during
the year ended December 31, 2009, as compared to fiscal 2008, primarily due
to increases in payroll and payroll related expenses of $6.3 million,
stock-based compensation expenses of $12.1 million, product development and
qualification expenses of $2.8 million, and software licenses expenses of $2.1
million. The increases were partially offset by decreases in
consulting and outside vendor expenses of $1.6 million. The increase in
payroll and payroll related expenses and stock-based compensation expenses were
primarily due to increases in engineering headcount to support our new product
development efforts, and as a result of the RMI acquisition. The increase in
product development and qualification expense was primarily due to the
production qualification and characterization of our processors. Product
development and qualification expenses vary from period to period depending on
the timing of development and tape-out of various products. The
increase in software licenses expenses was primarily due to amortization of
software licenses used for our internal research and development
projects. The remainder of the increase in research and development
expenses was caused by individually minor items. We expect
that research and development expenses will increase in dollar amount and may
increase as a percentage of revenues in 2010 and future periods because we
expect to continue to invest in hiring and training the necessary
employees and building systems infrastructures required to support the
development of new products, and improve existing products.
Selling, General and
Administrative Expenses. Selling, general and administrative expenses
increased during the year ended December 31, 2009, as compared with fiscal
2008, primarily due to increases in payroll and payroll related expenses of $4.5
million, stock-based compensation expenses of $12.6 million, legal expenses of
$0.7 million. The increases were offset partially by decreases in commission
expense of $0.3 million, consulting and outside vendor services expenses of $0.4
million, and other professional services expenses of $0.1
million. The increase in payroll and payroll related expenses and
stock-based compensation expenses resulted primarily from increases in headcount
to support our growing operations in the sales and marketing areas, and as a
result of the RMI acquisition. Selling, general and administrative
expenses also included $1.8 million of amortization expense for the customer
contracts and relationships, tradenames and trademarks, and non-competition
agreements intangible assets for the year ended December 31, 2009. The remainder
of the fluctuation in selling, general and administrative expenses was caused by
individually minor items We expect that selling, general and
administrative expenses will increase in dollar amount and may increase as a
percentage of revenues in 2010 and future periods because we expect to continue
to invest in hiring and training additional employees and making other
additional investments required to support our growing operations in the sales
and marketing areas due our expanded product portfolio as result of our
acquisitions.
Change in contingent
earn-out liability. The change in contingent earn-out liability was $2.0
million for the year ended December 31, 2009. The change in the
estimated fair value of the contingent earn-out liability to be paid out to the
former holders of RMI capital stock was due to an increase in the market price
of our common stock.
Acquisition-Related
Costs. Acquisition-related costs were $5.4 million for the year ended
December 31, 2009 primarily due to legal expenses of $3.1 million,
severance expenses of $0.9 million, consulting and outside vendor services of
$0.7 million, and other professional service of $0.5 million, related to the IDT
NSE and RMI acquisitions. We expect that acqusition-related costs
will decrease in dollar amount and may decrease as a percentage of revenues in
2010.
Other
items
The tables
below set forth other items for the years ended December 31, 2009
and 2008 (in thousands, except percentage data):
|
Year
ended
December
31,
2009
|
Percentage
of
Revenue
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Interest
income
|
$ | 992 | 0.6 | % | $ | 1,595 | 1.1 | % | $ | (603 | ) | -37.8 | % | |||||||||||
Interest
Income. Interest income decreased during the year ended
December 31, 2009, as compared with fiscal 2008, primarily due to decreased
interest income on cash and cash equivalents, and short-term investment balances
as a result of lower yields on our investments and lower invested balances due
to the financing of IDT NSE and RMI acquisitions.
|
Year
ended
December
31,
2009
|
Percentage
of
Revenue
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Interest
expense
|
$ | (1,666 | ) | -1.0 | % | $ | (33 | ) | 0.0 | % | $ | (1,633 | ) | 4948.5 | % | |||||||||
Interest
Expense. Interest expense increased during the year ended
December 31, 2009, as compared with fiscal 2008, primarily due to increased
interest expense of $1.5 million incurred on the line of credit and term notes
which were obtained to finance a portion of the IDT NSE and RMI
acquisitions.
|
Year
ended
December
31,
2009
|
Percentage
of
Revenue
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Other
income and expense, net
|
$ | (4 | ) | 0.0 | % | $ | (59 | ) | 0.0 | % | $ | 55 | -93.2 | % | ||||||||||
Other Income and
Expense, net. Other income and expense, net increased during
the year ended December 31, 2009, as compared with fiscal 2008, primarily
due to a decrease in software license write-offs incurred in 2008.
|
Year
ended
December
31,
2009
|
Percentage
of
Pre-Tax
Income
|
Year
ended
December
31,
2008
|
Percentage
of
Pre-Tax
Income
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Benefit
from income taxes
|
$ | (3,060 | ) | 6.1 | % | $ | (1,937 | ) | -118.1 | % | $ | (1,123 | ) | 58.0 | % | |||||||||
Benefit from income
taxes. During the
year ended December 31, 2009, we recorded an income tax benefit of
$3.1 million. Our effective tax rate of 6.1% for the year ended December
31, 2009 was primarily driven by a rate differential for book income
generated in foreign jurisdictions, the tax impact of non-deductible expenses
such as stock-based compensation expenses and acquisition related expenses and
adjustments to certain tax
reserves relating to an intercompany license agreement.
Stock-Based
Compensation Expense
On
January 1, 2006, we adopted ASC 718, on the modified prospective
application method, which requires the measurement and recognition of
compensation expense for all share-based awards made to our employees and
directors including employee stock options and employee stock purchases
outstanding as of and awarded after January 1, 2006. The total stock-based
compensation expense recognized for the years ended December 31, 2009, 2008
and 2007 was as follows (in thousands):
|
Year
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Cost
of revenue
|
$ | 672 | $ | 1,030 | $ | 747 | ||||||
|
Research
and development
|
21,527 | 9,474 | 9,933 | |||||||||
|
Selling,
general and administrative
|
18,556 | 5,988 | 5,366 | |||||||||
|
Total
stock-based compensation expense
|
$ | 40,755 | $ | 16,492 | $ | 16,046 | ||||||
In addition,
we capitalized approximately $0.1 million and $0.2 million of stock-based
compensation in inventory as of December 31, 2009 and 2008 which
represented indirect manufacturing costs related to our inventory.
Results
of Operations
Comparison
of Year Ended December 31, 2008 to Year Ended December 31,
2007
Revenue,
cost of revenue and gross profit
The table
below sets forth the fluctuations in revenue, cost of revenue and gross profit
data for the years ended December 31, 2008 and 2007 (in thousands, except
percentage data):
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year
ended
December
31,
2007
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Revenue
|
$ | 139,927 | 100.0 | % | $ | 109,033 | 100.0 | % | $ | 30,894 | 28.3 | % | ||||||||||||
|
Cost
of revenue
|
61,616 | 44.0 | % | 44,732 | 41.0 | % | 16,884 | 37.7 | % | |||||||||||||||
|
Gross
profit
|
$ | 78,311 | 56.0 | % | $ | 64,301 | 59.0 | % | $ | 14,010 | 21.8 | % | ||||||||||||
Revenue.
Revenue for the year ended December 31, 2008 increased by $30.9 million
compared with that of the year ended December 31, 2007. Revenue from sales
to Wintec, Cisco and Cisco’s contract manufacturers (collectively “Cisco”)
represented $52.7 million of our total revenue for the year ended
December 31, 2008, compared to $55.1 million during the year ended
December 31, 2007. The decrease in sales to Cisco was primarily due to a
decrease of $22.4 million from 2007 in revenue from sales of NL5000 products,
although this decline was largely offset by increased revenue of our new
and additional products for Cisco, including NL7000, NL8000, and TCAM2 products
which increased $20.7 million. Revenue from non-Cisco customers
represented $87.2 million of total revenue for the year ended December 31, 2008
compared with $53.9 million during the year end December 31,
2007. The increase in sales to non-Cisco customers was driven
primarily by increased demand for our products in several emerging new markets,
such as 10 Gigabit Ethernet, which we address with the PLPs that we
acquired in the Aeluros acquisition, and IPTV. During the year ended December
31, 2008, Alcatel-Lucent accounted for 12% of our total revenue compared with
11% in 2007.
Cost of Revenue/Gross
Profit/Gross Margin. Cost of revenue for the year ended December 31,
2008 increased by $16.9 million compared with that of the year ended December
31, 2007. Cost of revenue increased primarily due to the increase in
product sales. Cost of revenue in 2008 also included amortization of
intangible assets, and a provision for excess and obsolete inventory and product
scrap charges. Cost of revenue for the years ended December 31, 2008 and
2007, respectively, included $11.9 million and $5.0 million of amortization of
intangible assets expense, and $2.4 million and $1.0 million of a provision for
excess and obsolete inventory.
Operating
expenses
The table
below sets forth operating expense data for the years ended December 31,
2008 and 2007 (in thousands, except percentage data):
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year
ended
December
31,
2007
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Operating
expenses:
|
||||||||||||||||||||||||
|
Research
and development
|
$ | 51,607 | 36.9 | % | $ | 45,175 | 41.4 | % | $ | 6,432 | 14.2 | % | ||||||||||||
|
In-process
research and development
|
- | 0.0 | % | 1,610 | 1.5 | % | (1,610 | ) | -100.0 | % | ||||||||||||||
|
Selling,
general and administrative
|
26,567 | 19.0 | % | 19,672 | 18.0 | % | 6,895 | 35.0 | % | |||||||||||||||
|
Total
operating expenses
|
$ | 78,174 | 55.9 | % | $ | 66,457 | 60.9 | % | $ | 11,717 | 17.6 | % | ||||||||||||
Research and
Development Expenses. Research and development expenses increased during
the year ended December 31, 2008, as compared to fiscal 2007, primarily due
to increases in payroll related expenses of $3.8 million, product development
and qualification expenses of $2.1 million, and consulting and outside vendor
expenses of $1.0 million, which were partially offset by a decrease of
stock-based compensation expense of $0.5 million. The increase in payroll
related expenses resulted primarily from increases in engineering headcount in
India to support our new product development efforts, and in the U.S. as a
result of the Aeluros Acquisition. The increase in product development and
qualification expense was primarily due to the production qualification and
characterization of our newly introduced knowledge-based processors. The
remainder of the increase in research and development expenses was caused by
individually minor items.
In-Process Research
and Development. During
the year ended December 31, 2007, we recorded $1.6 million of in-process
research and development charge related to the Aeluros Acquisition at the close
of the acquisition.
Selling, General and
Administrative Expenses. Selling, general and administrative expenses
increased during the year ended December 31, 2008, as compared with fiscal
2007, primarily due to increased commission expenses of $1.7 million, payroll
related expenses of $1.7 million, amortization expense of intangible assets –
customer relationships of $1.1 million, consulting and outside vendor expense of
$1.0 million, other professional services fess of $0.4 million, stock-based
compensation expense of $0.6 million, and travel expense of $0.1 million. The
increase in commission expenses was primarily a result of our increase in
revenue. The increase in payroll related expenses and stock-based compensation
expense resulted primarily from increased headcount to support our growing
operations in the sales and marketing areas. The remainder of the fluctuation in
selling, general and administrative expenses was caused by individually minor
items.
Other
items
The tables
below set forth other items for the years ended December 31, 2008
and 2007 (in thousands, except percentage data):
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year
ended
December
31,
2007
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Interest
income
|
$ | 1,595 | 1.1 | % | $ | 4,431 | 4.1 | % | $ | (2,836 | ) | -64.0 | % | |||||||||||
Interest
Income. Interest income decreased during the year ended
December 31, 2008, as compared with fiscal 2007, primarily due to decreased
interest income on cash and cash equivalents, and short-term investment balances
as a result of lower yields on our investments and lower invested balances after
paying approximately $71.7 million in connection with the acquisitions of the
TCAM2 Products from Cypress and the Aeluros Acquisition.
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year
ended
December
31,
2007
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Interest
expense
|
$ | (33 | ) | 0.0 | % | $ | - | - | $ | (33 | ) | -100.0 | % | |||||||||||
Interest
Expense. Interest expense increased during the year ended
December 31, 2008, as compared with fiscal 2007, primarily due to increased
interest expense incurred on our software licenses.
|
Year
ended
December
31,
2008
|
Percentage
of
Revenue
|
Year
ended
December
31,
2007
|
Percentage
of
Revenue
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Other
income and expense, net
|
$ | (59 | ) | 0.0 | % | $ | 32 | 0.0 | % | $ | (91 | ) | -284.4 | % | ||||||||||
Other Income and
Expense, net. Other income and expense, net decreased during
the year ended December 31, 2008, as compared with fiscal 2007, primarily
due to software license write-offs incurred in 2008.
|
Year
ended
December
31,
2008
|
Percentage
of
Pre-Tax
Income
|
Year
ended
December
31,
2007
|
Percentage
of
Pre-Tax
Income
|
Year-to-Year
Change
|
Percentage
Change
|
|||||||||||||||||||
|
Provision
for (benefit from) income taxes
|
$ | (1,937 | ) | -1.4 | % | $ | (288 | ) | -0.3 | % | $ | (1,649 | ) | 572.6 | % | |||||||||
Provision for income
taxes. During the
year ended December 31, 2008, we recorded an income tax benefit of
$1.9 million. Our effective tax rate of 35% for the year ended December 31,
2008 was primarily driven by a rate differential for book income generated
in foreign jurisdictions and the tax impact of non-deductible stock
options.
Liquidity
and Capital Resources
Financial
Condition
Our principal
sources of liquidity are our cash and cash equivalents and our available senior
secured revolving credit facility of $25 million with a group of banks executed
in June 2009. As of December 31, 2009 our cash balance was $44.3 million. As of
December 31, 2009 there were no amounts outstanding related to our senior
secured term notes and our senior secured credit facility.
Our cash and
cash equivalents are invested with financial institutions in deposits that, at
times, may exceed federally insured limits. To date, we have not experienced any
losses on our deposits of cash and cash equivalents. However, we believe
that the capital and credit markets have been experiencing unprecedented levels
of volatility and disruption and that recent U.S. sub-prime mortgage defaults
have had a significant impact across various sectors of the financial markets,
causing global credit and liquidity issues. We can provide no assurance that our
cash and cash equivalents will not be adversely affected by these matters in the
future.
Under our
revolving senior secured credit facility, we are required to satisfy certain
financial ratio and other covenants, as described in Note 14 of the Notes to our
Consolidated Financial Statements. We were in compliance with the debt
covenants under the credit agreements applicable to this facility as of
December 31, 2009.
The table
below (in thousands) sets forth the key components of cash flow for the years
ended December 31, 2009, 2008 and 2007:
|
Year
ended December 31,
|
||||||||||||